How to Stop IRS Interest from Piling Up on Your Tax Debt

Owing the IRS is stressful, but watching that balance grow with relentless interest and penalties is even worse. Many taxpayers make payments only to find their debt stubbornly increasing month after month. If you are tired of this cycle, it is time to take action.

Let us break down how IRS interest works, when it can be reduced, and what you can do right now to stop the damage and regain control of your finances.

Why the IRS Keeps Adding Interest and Penalties

The IRS does not just charge you for unpaid taxes, they penalize you for not filing and add daily compounding interest on top of everything. 

Interest: This is a charge on your unpaid tax debt, which is calculated daily. The interest rate changes every three months, and it is based on the federal short-term rate plus 3%. It also applies to any unpaid penalties. This is why tax debt can grow so quickly, turning a manageable tax bill into a mountain of debt.

Penalties: These are charges for not filing on time or not paying on time. They are meant to encourage compliance.

• Failure to file penalty: Up to 25% of the unpaid tax.
• Failure to pay penalty: Up to 25%, accruing monthly.

This means that even a relatively small tax bill can balloon into something unmanageable over time. Worse, the longer you wait, the harder it gets to pay down.

Can You Really Get Rid of IRS Interest? The Options You Need to Know

Yes, there are several ways to deal with IRS interest. Your options depend on your situation.

Option 1: Interest Abatement

Interest abatement is when the IRS removes interest from your tax debt. This is usually only an option if the interest was caused by an “unreasonable error or delay” from the IRS itself.

• What is it? It’s a legal process to get the IRS to forgive the interest on your debt.
• Common reasons: An IRS employee gave you incorrect advice, or there was a mistake in processing your return. This does not apply to simple delays or mistakes on your part.
• Is it right for me? This is a difficult path, and the burden of proof is on you. It is often not the first or best option for most people.

Option 2: The IRS Fresh Start Program & Other Debt Forgiveness

The IRS Fresh Start Program refers to a group of tax relief options.

• What is it? This program includes options like Offer in Compromise and installment plans, making it easier for taxpayers to resolve their debt. To qualify, you must have all your tax returns filed and have proof of your income and expenses.
• How to apply: This is where understanding IRS Fresh Start Program requirements becomes critical. The process can be complex, but it can lead to a great outcome.
• Tax forgiveness: It is an informal term that often refers to the Offer in Compromise, which lets qualified taxpayers settle debt for less than owed.

Option 3: Other Solutions for Settling Tax Debt

What are the options for settling a tax debt with the IRS? The IRS has several programs designed to help people who cannot pay their tax bill.

• Offer in Compromise (OIC): This allows you to settle your tax debt with the IRS for less than the full amount you owe. The IRS considers your ability to pay, your income, expenses, and asset equity.
• Installment Agreements: This is a payment plan that allows you to make monthly payments for up to 72 months. It’s a good option if you need more time to pay but can afford regular payments.
• Currently Not Collectible (CNC): If the IRS determines you cannot pay your tax debt without facing hardship, they can label your account as “Currently Not Collectible.” This temporarily pauses collections until your financial situation improves.

Can the IRS Remove Interest?

In most cases, IRS interest cannot be waived. It’s legally required and continues until your full balance is paid.

However, there are exceptions:

• If the underlying penalty is removed, associated interest on that penalty may also be wiped out.
• If the IRS made a processing error or delay, you may qualify for an interest abatement.

So while you cannot eliminate interest completely, you can stop it from growing further by resolving the underlying tax debt.

Why the Balance Keeps Growing (Even When You’re Trying)

Many people try to make payments on their own or avoid the IRS altogether, hoping the problem will go away. Unfortunately, it will not, and interest ensures it only gets worse.

If you are making small payments without a formal agreement, the IRS applies your money to the oldest debt first, including interest and penalties. That means your efforts may barely touch the principal.

The thought of dealing with the IRS alone can be terrifying. But a problem can only be solved once you have a clear plan.

Does the IRS charge interest on payment plans?

Yes, the IRS legally requires interest to be charged on any unpaid balance, even when you are on a payment plan like an Installment Agreement. The interest is compounded daily and will continue to accrue until the tax debt is paid in full.

While you cannot stop interest on an existing balance, you can prevent it from growing by resolving the underlying tax debt. The IRS has several programs designed to help.

Ready to Stop IRS Interest in Its Tracks?

Tired of watching your balance grow no matter how much you pay? Precision Tax helps taxpayers reduce or eliminate penalties and negotiate smarter payment solutions.

We have helped thousands of clients:

• Eliminate penalties through abatement programs
• Qualify for IRS settlement offers
• Set up affordable payment plans to stop the bleeding
• Regain peace of mind and financial stability

Contact us today for a free, no-obligation consultation and start the path toward true tax relief.