If you owe the IRS money but cannot pay it all at once, you may be able to set up an installment agreement. This allows you to pay off your debt over time in monthly installments.
One common question that arises with installment agreements is: how much interest will I have to pay? The answer depends on several factors.
First, the IRS sets a federal short-term interest rate every three months. That rate is currently at 0.5 percent for the third quarter of 2021. This rate is used to calculate the interest on unpaid tax debt.
In addition to the federal interest rate, the IRS charges a late payment penalty of 0.5 percent per month on the unpaid balance. This penalty can be as high as 25 percent of the total tax owed.
For taxpayers who set up an installment agreement, the interest rate is typically higher than the federal short-term rate. As of July 2021, the IRS installment agreement interest rate is 3 percent.
This means that if you owe $10,000 to the IRS and set up an installment agreement, you would be charged 3 percent interest on the unpaid balance until the debt is paid off. If you were to pay off the entire balance in one year, you would pay approximately $300 in interest.
It`s important to note that interest and penalties will continue to accrue until your tax debt is paid in full. It`s also possible to have the IRS waive or reduce penalties and interest in certain circumstances, such as if you can demonstrate reasonable cause for not paying on time.
In conclusion, if you are considering setting up an installment agreement with the IRS, be prepared to pay interest and penalties on the unpaid balance. The interest rate is currently 3 percent, which can add up over time if the debt is not paid off quickly. It`s best to consult with a tax professional to determine the best course of action for your individual situation.