How much interest does the IRS charge on late taxes?

Under IRC section 6621 the underpayment rate for individuals is the federal short-term rate plus three percentage points, determined quarterly and compounded daily. For the quarter beginning 1 July 2026 the IRS established a 7 percent underpayment rate for individuals in Revenue Ruling 2026-10, based on a 4 percent federal short-term rate. The rate for the quarter beginning 1 April 2026 was 6 percent, which shows how quickly it moves. Check the current figure on the IRS quarterly interest rates page before relying on any published percentage, and remember that a multi-year catch-up accrues at the rate published for each quarter the balance was outstanding, not at one flat rate.

Can IRS interest be waived or abated?

Not on reasonable cause grounds. The IRS Interest page states that it does not remove or reduce interest for reasonable cause or as first-time relief, because interest under section 6601 is statutory compensation for the use of money rather than a penalty. Interest can be abated under section 6404(e)(1) where it is attributable to an unreasonable error or delay by an IRS officer or employee in a ministerial or managerial act, but the error must have occurred after the IRS contacted you in writing and you must not have contributed to it. Separately, under section 6404 the interest that accrued on a penalty is removed automatically if the penalty itself is removed.

Does the automatic two-month extension for expats stop interest running?

No. If you live outside the United States and Puerto Rico and your main place of business is abroad on the regular due date, you get an automatic extension to 15 June with a statement attached to the return. But IRS Publication 54 and the IRS automatic two-month extension page both state that even if you are allowed an extension, you will have to pay interest on any tax not paid by the regular due date of your return. Form 4868, which extends filing to 15 October, is likewise expressly not an extension of time to pay. Interest runs from the April deadline in every case.

Is there a maximum on IRS late filing and late payment penalties?

Yes on each penalty separately, and there is a combined ceiling worth knowing. The failure-to-file penalty caps at 25 percent of the unpaid tax and the failure-to-pay penalty caps at 25 percent. Because the failure-to-file penalty is reduced by the failure-to-pay penalty for months in which both apply, the filing penalty in practice tops out at 22.5 percent, giving a combined maximum of 47.5 percent of the unpaid tax on a single year. Interest has no cap at all and continues compounding daily on the tax and on the penalties until the balance is paid in full.

Does the Streamlined Foreign Offshore Procedure remove interest as well as penalties?

No. The IRS page for US taxpayers residing outside the United States states that failure-to-file, failure-to-pay, accuracy-related, information return and FBAR penalties will not be imposed on a compliant Streamlined Foreign Offshore submission. But the same page requires you to submit payment of all tax due as shown on the returns together with all applicable statutory interest on each late payment amount. Interest is a condition of the submission rather than something waived by it, so under Streamlined the interest becomes the entire cost above the tax, and the only way to reduce it is to complete and fund the submission sooner.

Can I use First Time Abate across several missed years at once?

No. The IRS Administrative Penalty Relief page confirms First Time Abate covers the failure-to-file, failure-to-pay and failure-to-deposit penalties, but it is applied to a single tax period, and where several years qualify the relief is given on the earliest qualifying year. You also need a clean three-year lookback with the same return type filed on time or not required, all currently required returns filed or extended, and any current tax paid or arranged. Remaining years need a reasonable cause argument on their own facts, and neither route touches the statutory interest on the underlying unpaid tax.

Missed US Tax Returns: Interest and Penalties

Missed US tax returns cost you considerably more than the tax you should have paid years ago, and the extra cost arrives in four separate layers rather than one. The Internal Revenue Service charges a failure-to-file penalty under Internal Revenue Code section 6651(a)(1) at 5 percent of the unpaid tax for each month or part month a return is late, capped at 25 percent. It charges a separate failure-to-pay penalty under section 6651(a)(2) at 0.5 percent of the unpaid tax per month or part month, also capped at 25 percent. On top of both, section 6601 imposes statutory interest on the unpaid tax from the original due date until the balance is paid in full, at a rate set quarterly under section 6621 and compounded daily. And interest runs on the penalties as well as on the tax. For an American in London catching up on several years, the penalties are frequently negotiable and the interest almost never is - which is exactly the opposite of what most people assume when they come to us.

Missed US tax returns: what do you actually owe beyond the tax itself?

The single most useful thing a catch-up filer can do is stop thinking about a single number called "what I owe" and start thinking about four separate meters, each running on its own clock and each with its own relief route. Two of those meters can be switched off retrospectively if the facts support it. Two of them cannot. Once you see which is which, the sequencing decisions - whether to pay now, whether to file first and negotiate later, whether to use a Streamlined submission - become much easier to make.

The tax itself, computed year by year on the return, after foreign tax credits under section 901 and any foreign earned income exclusion. This is the base on which everything else is calculated, so it is the number to get right first.
The failure-to-file penalty under section 6651(a)(1) - 5 percent of the unpaid tax per month or part month, maximum 25 percent, so it reaches its ceiling after five months. This penalty can be abated for reasonable cause or under the administrative first-time waiver.
The failure-to-pay penalty under section 6651(a)(2) - 0.5 percent of the unpaid tax per month or part month, maximum 25 percent, so it takes fifty months to reach its ceiling. This penalty can also be abated, and it keeps running long after the filing penalty has maxed out.
Statutory interest under section 6601, at the underpayment rate fixed quarterly by section 6621, compounded daily from the original unextended due date. This is compensation to the Treasury for the use of money, not a sanction, and it is not abated for reasonable cause.
Interest on the penalties themselves, which the IRS confirms it charges on its own Failure to File Penalty and Failure to Pay Penalty pages. On a five-year or six-year catch-up this is not a rounding error.

How much is the failure-to-file penalty, and what is the minimum charge?

The IRS Failure to File Penalty page states the rate plainly: 5 percent of the tax due, less any tax paid on time and available credits, for each month or partial month the return is late, accumulating to a maximum of 25 percent. Two features of that wording matter enormously in practice. First, the phrase "each month or partial month" means a return filed one day into a new month attracts a full further 5 percent - there is no daily proration on the penalties, unlike the interest. Second, the base is the tax due after credits, which is why so many Americans in the UK with straightforward employment income and full UK tax paid end up with a failure-to-file penalty of exactly nothing, even after years of silence. If the foreign tax credit reduces the US liability to zero, 5 percent of zero is zero.

There is a floor, however, for returns more than sixty days late. IRS Tax Topic no. 653 gives it as the lesser of 525 US dollars, for tax returns required to be filed in 2026, or 100 percent of the tax owed. That figure is indexed for inflation each year, so a multi-year catch-up will encounter different minimum amounts for different years, and you should check the amount published for the year in which each return was actually due. Again, note the construction: it is the lesser of the fixed amount and 100 percent of the tax. Where the tax for the year is zero, the minimum penalty is also zero.

How does the failure-to-pay penalty work, and when does the rate change?

The IRS Failure to Pay Penalty page sets the rate at 0.5 percent of the unpaid taxes for each month or part of a month the tax remains unpaid, with the same 25 percent ceiling. Because the monthly rate is a tenth of the filing penalty rate, it takes fifty months rather than five to reach that ceiling, which is why it is the failure-to-pay penalty, not the failure-to-file penalty, that dominates on genuinely old years. Two adjustments to the rate are worth knowing about before you receive a notice rather than after.

The rate doubles to 1 percent per month or part month if the tax is still unpaid ten days after the IRS issues a notice of intent to levy. For a UK-based filer whose US correspondence address is out of date, this is a real risk - the clock does not wait for the post to reach London.
The rate falls to 0.25 percent per month or part month during an approved instalment agreement, for individuals who filed the return on time. A catch-up filer who files late does not get the reduced rate on the years filed late, which is a distinction most published guidance glosses over.

What happens when both penalties apply in the same month?

This is the point at which most online guidance quietly gets the arithmetic wrong, usually by adding 5 percent and 0.5 percent to produce 5.5 percent a month. The IRS Failure to File Penalty page states the rule directly: when both penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty for that month. So the combined charge is 5 percent per month - 4.5 percent of failure to file plus 0.5 percent of failure to pay - not 5.5 percent. After five months the failure-to-file penalty has maxed out and stops, while the failure-to-pay penalty continues on its own.

Work that through to its conclusion and you get the combined ceiling that every catch-up filer should have in mind. Over the first five months the filing penalty accrues at 4.5 percent a month, reaching 22.5 percent rather than the headline 25 percent. The failure-to-pay penalty then continues at 0.5 percent a month until it reaches its own 25 percent cap. The maximum combined penalty exposure on a single unpaid year is therefore 47.5 percent of the unpaid tax - and that is before a single dollar of interest. Any year that has been outstanding for more than about four years is already sitting at or near that combined ceiling, which has an important practical consequence: for very old years, further delay stops increasing the penalties and only increases the interest.

How is IRS interest on late tax actually calculated?

Interest on underpayments is imposed by section 6601 and its rate is set by section 6621. For an individual, the underpayment rate is the federal short-term rate plus three percentage points. The rate is determined quarterly, published in a revenue ruling in the Internal Revenue Bulletin, and applied with daily compounding. Interest begins on the original, unextended due date of the return and runs until the balance is paid in full. There is no cap. Where the two penalties stop at 25 percent each, interest simply keeps going.

For the calendar quarter beginning 1 July 2026 and running to 30 September 2026, the IRS established an underpayment rate of 7 percent for individuals, based on a federal short-term rate of 4 percent, in Revenue Ruling 2026-10 published in Internal Revenue Bulletin 2026-22. That figure is correct only for that quarter. The rate was 6 percent for the quarter beginning 1 April 2026 and 7 percent for the quarter beginning 1 January 2026. Before you rely on any percentage you read anywhere, including here, check the current quarter on the IRS quarterly interest rates page - the rate genuinely changes, and a rate quoted in a blog post is a snapshot, not a fact about your liability.

Why does a multi-year catch-up carry different interest rates across years?

Because the rate is reset every quarter and applied to whatever balance is outstanding during that quarter, a six-year catch-up does not carry one interest rate. It carries a sequence of them. The 2019 balance has accrued at whatever the published rate was in each of the roughly twenty-eight quarters since its due date; the 2023 balance has accrued at the rates published across a much shorter run of quarters. Anyone who quotes you a single blended percentage for a multi-year catch-up is estimating, not calculating.

This matters for two reasons. First, it means the interest component of an old year can be a much larger fraction of the tax than clients expect, particularly for years that were outstanding through the higher-rate quarters of recent years. Second, it means the IRS computation on the notice you eventually receive will not match a back-of-envelope estimate, and the difference is usually the IRS being right. We model the exposure quarter by quarter for the years in question rather than applying a flat rate, precisely because the flat-rate answer is always wrong and is usually wrong on the low side.

Does interest accrue on the penalties as well as the tax?

Yes, and this is the layer that people miss when they build their own spreadsheet. Both the Failure to File Penalty page and the Failure to Pay Penalty page state that the IRS charges interest on penalties, and the IRS Interest page confirms that interest continues to accrue daily on any amount not paid, including on both penalties and interest. The start date differs by penalty type but is generally the return due date or the date of the notice. On a year where the combined penalties have reached 47.5 percent of the tax, the interest is compounding on a base almost half as large again as the tax alone.

Can IRS interest be waived on the same reasonable cause grounds as penalties?

No, and this is the most important single sentence in this article. The IRS Interest page states it without hedging: the IRS does not remove or reduce interest for reasonable cause or as first-time relief. Interest under section 6601 is statutory compensation for the use of the government's money over the period it was outstanding. It is not a sanction for bad behaviour, so an explanation of why you behaved as you did is logically irrelevant to it. A beautifully drafted reasonable cause statement that wipes out every penalty leaves the interest entirely intact.

There are narrow circumstances in which interest can be reduced, and they are worth knowing even though most catch-up filers will not qualify for any of them.

Derivative abatement. Under section 6404, if a penalty is removed or reduced, the interest that accrued on that penalty is automatically removed or reduced with it. So penalty relief does reduce interest - but only the interest attributable to the penalty, never the interest on the tax.
IRS error or delay. Section 6404(e)(1) permits abatement of interest attributable to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act. The bar is high: the error must have occurred after the IRS contacted you in writing about the examination or the underpayment, and neither you nor your representative can have significantly contributed to it. Generic IRS slowness is not enough.
Timing limits on the claim. A request for interest abatement, made on Form 843 or by signed letter with supporting correspondence and account transcripts, must generally be filed within three years of when the return was originally filed or two years from the date of payment, whichever is later.
Disaster and combat zone postponements, which shift the date from which interest runs for affected taxpayers. These are announced situation by situation and will not apply to an ordinary UK-resident catch-up.

What penalty relief genuinely exists, and what are its limits?

Two administrative routes matter for missed US tax returns. Reasonable cause relief, described on the IRS Penalty Relief due to Reasonable Cause page, applies to the failure-to-file and failure-to-pay penalties among others, and turns on whether you exercised ordinary business care and prudence but were nevertheless unable to comply. The IRS looks at the facts: serious illness with dates, inability to obtain records, natural disaster, and similar circumstances. It is explicit that a simple lack of knowledge of the obligation, ordinary oversight, and reliance on a tax professional generally do not qualify on their own, and that lack of funds alone does not establish reasonable cause for late payment - though lack of funds combined with evidence of genuine efforts to comply can support the argument.

The second route is the administrative waiver the IRS calls First Time Abate, set out on its Administrative Penalty Relief page. It covers the failure-to-file penalty under section 6651(a)(1), the failure-to-pay penalty under section 6651(a)(2) or (a)(3), and the failure-to-deposit penalty under section 6656. To qualify you must have filed the same type of return on time, or not been required to file it, for the three preceding years with no penalty assessed other than an estimated tax penalty, must have filed or extended all currently required returns, and must have paid or arranged to pay any tax currently due. Three limits are routinely overlooked.

It applies to one tax period only. Where several years qualify, the relief is applied to the earliest qualifying year - which in a catch-up is very often the year with the largest accrued penalties, so the ordering works in the filer's favour, but it means the remaining years still need reasonable cause or nothing at all.
It does not cover event-based information return penalties, which is why it is not a general answer to a late Form 5471 or a late Form 8938 attached to a delinquent return.
It does nothing whatsoever to the interest on the tax. It removes a penalty and, derivatively, the interest on that penalty. The section 6601 interest on the underpayment survives untouched.

How does a Streamlined Foreign Offshore submission change this arithmetic?

For a non-willful filer who meets the non-residency test, the Streamlined Foreign Offshore Procedures are usually the cleanest route, and the published terms deal with the penalty layer comprehensively. The IRS page for US taxpayers residing outside the United States requires three years of delinquent or amended returns, six years of FBARs, and a signed Form 14653 certifying non-willfulness. Provided the submission is complete and correct, the IRS states that failure-to-file, failure-to-pay, accuracy-related, information return and FBAR penalties will not be imposed.

Read that list again and notice what is absent. The same page requires the taxpayer to submit payment of all tax due as reflected on the returns and all applicable statutory interest with respect to each of the late payment amounts. Interest is not waived under Streamlined - it is a condition of the submission. This flips the usual mental model completely. Under a Streamlined submission there is nothing left to negotiate on penalties because they are already gone by the terms of the programme, and nothing available to negotiate on interest because it is statutory. The entire cost above the tax is the interest, and the only lever you have on it is time. Every month between deciding to come forward and actually funding the payment is a month of daily compounding you chose to accept.

Does the automatic two-month extension for Americans in the UK stop interest?

It does not, and this is the single most costly misunderstanding among Americans living in the UK. If on the regular due date you live outside the United States and Puerto Rico and your main place of business is abroad, you get an automatic two-month extension to 15 June, with no form to file - you attach a statement to the return explaining which situation qualified you. IRS Publication 54 and the IRS page on the automatic two-month extension both then say the same thing: even if you are allowed an extension, you will have to pay interest on any tax not paid by the regular due date of your return.

So the automatic extension moves the filing deadline and gives relief from the late-filing consequence for those two months. It does not move the payment date for interest purposes. Nor does Form 4868, which extends the filing deadline to 15 October and is explicitly not an extension of time to pay, nor a further discretionary extension of the kind Publication 54 describes. For a UK-resident client whose US liability is driven by investment income, the practical effect is that interest has been running since the April deadline of every year in the catch-up, including the years in which they believed they were comfortably within an extension. In our experience this accounts for a large share of the gap between what clients expect the final number to be and what it actually is.

Where does the unpaid tax actually come from for a UK-resident filer?

This question decides everything, because all three of the penalty and interest charges are computed on unpaid tax. If the unpaid tax is nil, the exposure above the tax is nil no matter how many years have gone by. UK income tax rates on employment income generally exceed US rates, so foreign tax credits under section 901 frequently eliminate the US liability on salary and bonus. The real US tax in a London catch-up almost always comes from somewhere else.

The net investment income tax under section 1411 at 3.8 percent, which foreign tax credits under section 901 do not offset. For an investor or banker with substantial dividend, interest and gain income, this is very often the largest genuine unpaid US liability across the catch-up years, and therefore the largest driver of interest.
Timing and character mismatches between the two systems - gains realised in a UK tax year that fall into a different US year, disposals that are taxable in one country and relieved in the other, and foreign currency gain on the repayment of a sterling mortgage.
US-source income where the UK is the residence country and the credit runs the other way, including US dividends, US rental property and certain US-source deferred compensation.
Self-employment tax on consultancy or partnership income where no certificate of coverage was obtained under the US-UK totalisation agreement. Foreign tax credits do not reduce self-employment tax, so it produces unpaid US tax dollar for dollar.
Years in which the foreign earned income exclusion was assumed rather than elected, and the election has to be reconstructed on a delinquent return.

A worked example: five missed years for a London filer

The following figures are ILLUSTRATIVE ONLY and are used to show the mechanics, not to predict any particular outcome. Charlotte Aldridge is a fictional US citizen and long-term London resident, a managing director at an investment bank, with a large listed portfolio and no US employment income. She has not filed a US return for five years because she believed her UK PAYE covered everything. Her salary and bonus generate full foreign tax credits and produce no US tax. Her portfolio does not: dividends, interest and realised gains carry a net investment income tax liability that credits cannot touch, and one year includes a significant US-source distribution.

Take the oldest year in the catch-up in isolation, with an ILLUSTRATIVE unpaid US tax of 40,000 US dollars, and assume that year is now four years past its due date. The failure-to-file penalty ran at 4.5 percent for five months, reduced by the failure-to-pay penalty in those same months, and stopped at 22.5 percent - that is 9,000 US dollars. The failure-to-pay penalty ran at 0.5 percent a month for fifty months and reached its 25 percent ceiling - a further 10,000 US dollars. The combined penalty is 19,000 US dollars, 47.5 percent of the tax. Interest on the tax, if a 7 percent rate had applied throughout the four years with daily compounding, would add roughly 12,900 US dollars, and in reality the figure would differ because the published rate changed from quarter to quarter across that period. Interest also accrued on the penalties. The year that started as a 40,000 dollar tax bill is now comfortably over 70,000 US dollars.

Now apply the Streamlined Foreign Offshore terms to the same year. If Charlotte's conduct was non-willful and she meets the non-residency test, the 19,000 US dollars of penalties are not imposed. The roughly 12,900 US dollars of statutory interest still has to be paid with the submission. Two conclusions follow, and they are the two that drive our advice. First, the qualifying decision on Streamlined is worth far more than any penalty argument, because it disposes of the entire penalty layer by the terms of the programme. Second, once you are within Streamlined, the only remaining variable you control is how long the interest keeps running - and that is a question about the speed of the engagement and the timing of the payment, not about tax law at all.

Should you pay before the returns are finished?

Very often, yes, and this is the sequencing point almost no published guidance addresses. The IRS itself advises taxpayers with past due returns to file and pay now to limit interest charges and late payment penalties. Interest stops accruing on any amount from the date the IRS receives it, whether or not the return supporting it has been filed. If you know from a preliminary computation that you will owe something in the region of 100,000 US dollars across the catch-up years, remitting a substantial payment while the returns are still being prepared stops the daily compounding on that amount immediately, and does so weeks or months before the filing is complete.

There are two mechanisms and they are not interchangeable. An ordinary advance payment, designated in writing to a specific form and tax year, is applied to that year and stops interest on it from the date of receipt; it cannot generally be pulled back at will if the final computation turns out lower, although an overpayment can be refunded or applied forward subject to the refund limitation periods. Alternatively, a remittance designated in writing as a deposit under section 6603, following the procedures in Revenue Procedure 2005-18, also suspends the running of interest on a potential underpayment from the date of receipt but is generally capable of being withdrawn. For most catch-up filers who simply want the clock stopped on an amount they are confident they owe, the designated advance payment is the simpler instrument. Where the liability is genuinely uncertain and flexibility matters, the section 6603 deposit route is worth considering with your preparer before the money moves.

One further mechanical point that changes how partial payments behave. Tax Topic no. 653 states that the IRS applies payments to the tax first, then to any penalty, and then to interest. Because the failure-to-pay penalty and the interest are both computed on the unpaid tax, a payment directed at the tax reduces the base on which both continue to accrue. A partial payment is therefore not merely a proportionate reduction of the total - it disproportionately slows the meters that are still running. Where funds are limited across a multi-year catch-up, directing them at the years with the largest remaining unpaid tax, rather than spreading them evenly, generally produces the better outcome, because the years that have already hit the 47.5 percent combined penalty ceiling can only get worse through interest.

How do you estimate the exposure before committing to a route?

Never commit to a compliance route on an unquantified liability. The estimate does not need to be exact, but it needs to be built in the right order, and it can usually be produced in days rather than weeks from documents you already hold.

Compute a draft US tax for each year first, with foreign tax credits and any exclusion applied, and isolate the items credits cannot reach - net investment income tax, self-employment tax and US-source income. Years with no unpaid tax carry no penalties and no interest, and should be identified early so they stop consuming attention.
Apply the two section 6651 penalties year by year against the elapsed months, remembering the 4.5 percent plus 0.5 percent overlap rule and the 47.5 percent combined ceiling on old years, and check the indexed minimum penalty for any year where the tax is small but not nil.
Layer interest on quarter by quarter using the published section 6621 rates for each quarter the balance was outstanding, rather than a single blended rate, and add interest on the penalties.
Then, and only then, test the routes. Compare the total under a Streamlined Foreign Offshore submission, where the penalties fall away but the interest does not, against a plain delinquent filing supported by a reasonable cause statement and a First Time Abate request on the earliest qualifying year.
Finally, price the delay. Multiply the estimated unpaid tax by the current quarterly rate and divide by twelve to get the approximate monthly cost of continuing to think about it. For most HNW catch-up filers that number is large enough to settle the question of urgency on its own.
Convert only at the end. The tax, penalties and interest are all computed in US dollars, so a UK-resident filer funding the payment from sterling carries exchange rate movement on the whole stack between decision and payment. That is a real cost of delay that sits outside the tax computation entirely.

The practitioner view

Missed US tax returns are, in our experience, almost never as expensive as clients fear on the penalty side and almost always more expensive than they expect on the interest side. Penalties respond to argument, to a clean compliance history and above all to the terms of the Streamlined Foreign Offshore Procedures. Interest responds only to money and to time. That asymmetry should drive the whole sequence: quantify the unpaid tax quickly and accurately, stop the interest clock with a designated payment as soon as the number is reliable, and take the time you need on the penalty position afterwards, because the penalty position is the part that will still be there to argue when the returns are filed. We prepare the returns, build the computation quarter by quarter, and file the relief requests - and we would rather have the conversation about stopping the clock in week one than in month six.