The IRS Penalty Game: Think You Know How Interest Works? Think Again!

Imagine this scenario: You filed your tax return 5 months late, owing $100,000 in taxes. That late filing triggers:

• A Failure to File (FTF) penalty of 22.5% = $22,500
• A Failure to Pay (FTP) penalty of 2.5% = $2,500

Altogether, that’s 25% in penalties - a $25,000 hit on top of the $100,000 tax bill.

But here’s where it gets interesting.

There’s one piece left to calculate: interest.

When you owe the IRS money and pay late, they don’t just let you off with penalties - they want interest too.

So, here’s my question:

What amount do you think the IRS calculates interest on?

Your first guess might be the $100K you owed in taxes. That would make sense, right?

Wrong.

The IRS will calculate interest on $122,500 - the $100K tax due plus the $22,500 FTF penalty.

Why? Because the IRS treats the FTF penalty as if it was owed from the return’s due date. Since you filed 5 months late, they start charging interest on that penalty from day one.

The FTP penalty, on the other hand, works differently. Interest will only be assessed once the IRS formally adds it to your account, so interest on that portion kicks in later.

So, when the IRS sends your penalty notice, here’s what it will include:

• Tax due: $100,000
• FTF penalty: $22,500
• FTP penalty: $2,500
• Interest calculated on $122,500 (and remember, the interest rate might change every quarter).

Hope this helps!