If you owe taxes and decide to delay full payment, the IRS applies two main charges that can significantly increase the amount you ultimately pay. These costs begin after the original due date of your 2025 tax return, April 15, 2026, even if you file for an extension.

The Two Main Costs

1. Failure-to-Pay Penalty: This penalty accrues at 0.5% per month (or part of a month) on the unpaid tax balance, up to a maximum of 25%. If you set up an approved IRS installment agreement, the rate drops to 0.25% per month while the plan is active.
2. Interest: Interest is charged on both the unpaid tax and any accrued penalties. As of early 2026, the rate is 7% per year, compounded daily. Unlike the penalty, interest has no cap and continues to accrue until the balance is paid in full. Note that the IRS adjusts this rate quarterly — it is scheduled to decrease to 6% beginning in the second quarter of 2026.

Cost Example: $30,000 Tax Balance

Here’s an approximation of how quickly costs can add up if you owe $30,000 and delay payment (assuming your return is filed on time):

These figures are estimates only. Actual costs depend on the exact payment timing, any quarterly changes in the IRS interest rate, and whether an installment agreement is in place.

Additional Risk: Underpayment of Estimated Taxes

If you did not make sufficient quarterly estimated payments during 2025, you may also owe a separate underpayment penalty. Owing a large balance like $30,000 at filing time often signals that estimated taxes were underpaid throughout the year.

You can usually avoid this penalty by meeting the IRS safe harbor rules: paying at least 90% of your 2025 total tax liability or 100% of your 2024 tax (110% if your 2024 AGI exceeded $150,000).

How to Avoid These Costly Situations

The good news is that most of these penalties and interest charges are preventable with proper planning. Here are the most effective strategies we recommend to our clients:

• Make Accurate Quarterly Estimated Tax Payments This is the single best way to avoid underpayment penalties. We can help you estimate your liability throughout the year and adjust payments as needed.
• Pay Your Tax Balance as Soon as Possible Even partial payments reduce the balance on which penalties and interest accrue.
• Set Up an IRS Installment Agreement Applying for a payment plan online can immediately lower the failure-to-pay penalty rate to 0.25%. We can guide you through this process.
• File for an Extension — But Still Pay on Time An extension gives you until October 15, 2026, to file your return, but you must pay any taxes owed by April 15, 2026, to minimize penalties and interest.
• Consider Short-Term Financing Options If cash flow is tight, compare the cost of a short-term loan, home equity line of credit, or low-interest credit card against the IRS’s combined penalty and interest rate. In many cases, borrowing is cheaper than letting IRS charges accumulate.
• Proactive Year-Round Tax Planning Working closely with your tax advisor and us throughout the year allows us to forecast liabilities, optimize withholding or estimated payments, and implement tax-efficient strategies before surprises arise at tax time.

We’re Here to Help

At Nicollet Investment Management, we work closely with your CPA to help you avoid these costly delays through proactive cash flow planning, estimated tax coordination, and integrated tax-aware investment strategies.

Important Disclaimer

“This white paper is provided for informational and educational purposes only and does not constitute investment advice, legal advice, or tax advice, and should not be relied upon as such. The information contained herein is believed to be from reliable sources but is not guaranteed as to accuracy or completeness, and the adviser undertakes no obligation to update or revise this material to reflect subsequent events or circumstances. Investing involves risk, including the possible loss of principal; past performance is not indicative of future results. Advisory recommendations are subject to individual suitability considerations, and this material may not be appropriate for all investors. Registration as an investment adviser does not imply any particular level of skill or training. Prospective clients should consult with qualified legal, tax, and financial professionals before making any investment decision and should carefully review the adviser’s Form ADV prior to engaging advisory services.”