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IRS Penalties and Interest Explained in Plain English: Why Your Balance Keeps Growing and What Usually Happens Over Time

One of the most confusing and frustrating parts of dealing with the IRS is watching a tax balance grow — even when no new letters seem to be arriving.

Many people check their IRS account and think, “I didn’t do anything — why does this number keep going up?”

The answer is usually penalties and interest.

This page explains IRS penalties and interest in plain English — why they exist, how they’re added, when they stop, and how they fit into the overall IRS notice and collection process.

Why the IRS Charges Penalties and Interest

The IRS uses penalties and interest to encourage timely filing and payment of taxes.

They are not personal, emotional, or punitive in the way many people imagine. They are automatic additions required by law when certain conditions occur.

Once a tax is assessed, penalties and interest generally continue to accrue until the balance is paid or otherwise resolved.

The Most Common IRS Penalties

Failure-to-File Penalty

This penalty applies when a tax return is filed late. It is typically much larger than other penalties.

In many cases, this penalty is triggered before the IRS ever sends a CP14 notice.

Even if you cannot pay, filing the return usually reduces overall penalties.

Failure-to-Pay Penalty

This penalty applies when taxes are filed but not paid in full.

It accrues monthly and continues until the balance is resolved. This is why balances often grow steadily between CP501, CP503, and CP504 notices.

Accuracy-Related Penalties

These penalties often appear after audits or proposed changes. They are commonly associated with:

They apply when the IRS believes income was understated or deductions were overstated.

How IRS Interest Works

Interest is separate from penalties.

It is charged on:

  • Unpaid tax
  • Unpaid penalties

Interest compounds daily and is adjusted quarterly. This means balances can increase faster than people expect.

Interest usually continues until the balance is fully paid, even if you are on a payment plan.

Why Balances Often Grow Between IRS Letters

Many people assume IRS letters cause balances to increase. In reality, balances increase because time passes.

Between letters like:

  • CP14
  • CP501
  • CP503
  • CP504

penalties and interest continue to accrue quietly in the background.

This is why two people with the same original tax bill can owe very different amounts months later.

Penalties and IRS Enforcement Actions

Penalties and interest do not automatically trigger enforcement. They simply increase the balance.

Enforcement actions occur when balances remain unresolved long enough. These can include:

Understanding penalties helps explain why IRS actions escalate over time.

Do IRS Payment Plans Stop Penalties and Interest?

This is a very common question.

Generally:

  • Interest continues
  • Some penalties may be reduced

Payment plans are designed to manage collections, not eliminate charges.

This is why people sometimes notice balances changing even after setting up an installment agreement.

Can IRS Penalties Ever Be Removed?

In certain situations, penalties may be reduced or removed. This is separate from audits, reconsideration, or payment plans.

Penalty relief depends on circumstances and IRS criteria. It is not automatic and not guaranteed.

Interest related to penalties may also change if penalties are adjusted.

How Penalties Relate to IRS Audits

After audits, penalties often appear suddenly. This surprises people who believed the audit only affected tax.

Audit-related penalties frequently connect to:

This is another reason balances can grow rapidly after audit conclusions.

Penalties, Time, and the IRS Collection Clock

Penalties and interest continue throughout the IRS collection period.

Understanding how long the IRS has to collect a tax debt helps explain why balances change over many years.

Key Takeaways

  • Penalties and interest are automatic and time-based
  • They explain why balances grow even without new letters
  • Payment plans manage collections, not charges
  • Audits often trigger additional penalties

If you are unsure which stage you are in, start with understanding what your IRS letter means.

Educational purpose only.
This site is not affiliated with the IRS or any government entity.