If you owe back taxes and you’re waiting until you “figure out the money,” you’re not hitting pause on your balance. You’re watching it grow. Every single day.
How much can back taxes cost over time?
Back taxes can grow through IRS interest, failure-to-pay penalties, failure-to-file penalties, and state-level interest charges. IRS interest compounds daily from the original tax due date until the balance is paid in full. Even if you set up a payment plan, interest usually continues to accrue, although certain penalties may be reduced.
Here’s what you’re actually being charged, where the numbers come from, and what you can do about it.
How IRS Interest Works on Back Taxes
The IRS is required by law to charge interest on any unpaid tax balance. It starts accruing on the due date of your return, not the date you get a notice, not the date you find out about the problem. The clock starts on April 15 (or whatever the filing deadline was for that year), and it runs until the day your balance is paid in full.
The interest rate is set quarterly by the IRS and is calculated as the federal short-term rate plus 3 percentage points. For 2026, that comes out to 7% for the first quarter and drops to 6% starting in the second quarter.
What makes this rate hit harder than it looks on paper is how it compounds. According to the IRS, interest is assessed on the previous day’s balance plus all interest already accrued. That means you’re paying interest on interest, every single day, and the balance grows faster over time as a result.
On a $10,000 unpaid balance at 7% compounded daily, you’re looking at roughly $725 in interest after one year. After three years, that number climbs to over $2,300, and that’s before any penalties are included.
IRS Penalties on Unpaid Taxes
Interest is only part of the bill. If you didn’t pay your taxes by the deadline, the IRS also charges a failure-to-pay penalty. Per H&R Block, that penalty starts at 0.5% of your unpaid balance per month and caps out at 25% of the total tax owed.
Here’s the part most people don’t know: interest also accrues on those penalties. So as your penalty balance grows, so does the interest being charged on top of it.
If you also failed to file your return at all, the failure-to-file penalty is significantly steeper, at 5% per month up to 25%. The IRS Taxpayer Advocate Service confirms that interest accrues on penalties just like it does on the underlying tax, compounding the total you owe even further.
The good news is that penalties can sometimes be reduced or removed. The IRS offers First Time Penalty Abatement for taxpayers with a clean compliance history, and reasonable cause abatement for situations involving circumstances beyond your control. Interest, on the other hand, is almost never reduced. As H&R Block notes, the IRS won’t remove interest most of the time, and the most reliable way to stop it is to pay the balance or set up a payment agreement as quickly as possible.
If you’re not sure how much of your balance is tax, interest, or penalties, Boxelder can help you break down the numbers and identify which resolution options may apply.
State Interest Rates on Unpaid Taxes
Federal interest is just one layer. Every state that has an income tax also charges its own interest on unpaid state tax balances, and those rates are set independently from the IRS. Depending on where you live, your state rate could be higher than what the federal government is charging.
Here’s a look at what residents in three key states are facing:
Colorado
The Colorado Department of Revenue sets its interest rate annually. For 2026, the rate is 11%. For 2025, it was 12%. That’s on top of whatever the IRS is charging on your federal balance. Colorado also assesses a late payment penalty of 5% of the unpaid tax, plus an additional 0.5% for each month it remains unpaid, capped at 12%.
Kansas
The Kansas Department of Revenue charges 8% annually for 2026, down from 9% in 2025. Unlike the IRS, Kansas does not compound interest on penalties or on the interest itself, but the rate still adds up over time. Kansas also assesses a late payment penalty of 1% per month on the unpaid balance, up to a maximum of 24%.
Ohio
Ohio’s income tax interest rate is set annually by the Tax Commissioner and is tied to the federal short-term rate under Ohio Revised Code Section 5703.47. The Ohio Department of Taxation maintains an interest calculator at tax.ohio.gov where you can look up the current rate and calculate what you owe based on your specific balance and time period.
If you live in a state not listed here, your state’s Department of Revenue website is the most reliable place to find the current annual interest rate on unpaid income taxes. These rates change from year to year, so anything you read on a third-party site should be verified against the official source.
Why Waiting to Pay Back Taxes Costs More Over Time
The most common reason people let tax debt sit is that the full amount feels impossible to pay right now. That’s understandable. But waiting without a plan means the number you’re avoiding gets larger every day, and the eventual solution gets harder to negotiate.
A few things worth knowing:
Setting up a payment plan with the IRS does not stop interest from accruing, but it does reduce your failure-to-pay penalty from 0.5% per month to 0.25% per month while the agreement is active. That’s meaningful savings, especially on larger balances.
The IRS also has programs for people who genuinely can’t pay what they owe, including Offer in Compromise, which allows qualifying taxpayers to settle their debt for less than the full amount, and Currently Not Collectible status, which temporarily pauses collection activity. These options have specific eligibility requirements and are worth exploring with a tax professional before assuming they apply to your situation.
Partial payments help too. Every dollar you pay reduces the principal balance, which directly reduces the daily interest calculation going forward.
What to Do If You Owe Back Taxes
Back taxes don’t stay still. The IRS charges daily compounding interest from the original due date, your state adds its own rate on top, and penalties pile on alongside both. The longer a balance sits, the harder it is to manage on your own.
The best move is always to get a clear picture of what you actually owe, understand your options, and start working toward a resolution, even if you can’t pay everything at once.
That’s exactly what Boxelder helps people do. Whether you’re dealing with a balance that’s been sitting for a year or one that’s been growing for a decade, our team works through the numbers with you and finds a realistic path forward.
Contact Boxelder for a free consultation.
FAQs About Back Taxes, Interest, and Penalties
Does IRS interest compound daily?
Yes. IRS interest generally compounds daily on unpaid tax balances, meaning interest can accrue on both the original balance and previously accrued interest.
Can IRS interest be removed?
Usually, no. IRS interest is difficult to remove unless the underlying tax or penalty is reduced. Penalties may be eligible for abatement in some cases, but interest is much harder to eliminate.
Does an IRS payment plan stop interest?
No. An IRS payment plan does not stop interest from accruing, but it may reduce the failure-to-pay penalty while the agreement is active.
Do states charge interest on back taxes too?
Yes. Many states charge their own interest and penalties on unpaid state income tax balances, separate from IRS charges.
What should I do if I can’t afford to pay my back taxes?
You may be able to set up a payment plan, request penalty abatement, apply for Currently Not Collectible status, or explore an Offer in Compromise depending on your financial situation.
