What is the IRS Payment Plan Interest Rate?

IRS payment plans work just like a regular loan. You make monthly payments on your balance, including interest, until you pay off your back taxes. Here’s what you need to know about the IRS payment plan interest rate.

This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.

What is the interest rate on an IRS payment plan?

An IRS installment agreement doesn’t have its own interest rate. Instead, you pay the interest rate for underpayment of taxes.

The interest rate for underpayment of taxes is the federal funds rate plus 3%. The IRS updates the interest rate every quarter. Your payment plan will have a variable rate with the interest charges for each month matching the current IRS interest rate.

The federal funds rate is the rate at which banks and credit unions loan each other money. This is the rate you hear about on the news when they talk about the Fed changing interest rates to slow inflation or improve unemployment.

When does the IRS begin charging interest?

IRS interest begins accruing the day after the payment deadline for your taxes. For most people, that’s April 15th each year. If you request an extension of time to file, you do not get more time to pay, and interest still begins on April 15th.

The payment deadline is the day interest starts for both any money you owed when you filed your tax return as well as if the IRS later says you didn’t pay enough. For example, if they tell you in July you made a mistake and owe more taxes, you have to pay interest on that amount from April 15th instead of from July.

What are the other costs of an IRS installment agreement?

There are two additional costs of an IRS installment agreement. It’s important to understand these costs so you can make sure an IRS payment plan is right for you.

For example, if you can get a personal loan with the same interest rate as an IRS payment plan, the personal loan may be a better option since it may not have these additional costs.

Processing Fees

IRS payment plans have one-time setup fees ranging from $31 to $225 or more. It depends on whether you apply online, by mail, or by phone. It also depends on your balance due and whether you set up automatic payments.

Failing to Pay Penalty

Using an IRS installment agreement stops the IRS from taking other collections actions, but it doesn’t stop late payment penalties. The failing to pay penalty is essentially an additional interest charge.

The normal penalty is 0.5% per month. Once you’re on a payment plan, the penalty drops to 0.25% per month. The penalty applies to the amount of taxes you still owe as of that month (not your original balance).

You will never pay more than 25% of your original amount owed as a failing to pay penalty. Once your penalties hit 25%, they stop adding on.

What are your other options to pay the IRS?

There are several options you may want to consider as an alternative to an IRS payment plan.

  • You may have other borrowing options like using credit cards or taking out a personal loan. Depending on your credit, the interest rate and/or other costs may be lower than using an IRS installment plan. You also won’t have to worry about the other rules that come with a payment plan.
  • If you can’t afford to pay what you owe, you may be able to use other IRS debt relief options. If you can’t pay anything at all, you may qualify for currently not collectible status. If you can only pay a small amount, you may qualify for an offer in compromise.

 Conclusion

At only 3% above the federal funds rate, the IRS payment plan interest rate is fairly reasonable. However, there are other costs and rules you should consider. Check your private lending options before deciding an IRS payment plan is right for you.

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