IRM Part 20:
Penalty & Interest
Every penalty the IRS can hit you with, how they calculate it, and — more importantly — how to get it abated. Understanding IRM Part 20 is how you slash your bill before it compounds into a life sentence.
View official IRM Part 20 on IRS.govTable of Contents — Penalty Sections
IRM 20.1 — Penalty Handbook — Overview
General penalty principles, reasonable cause standards, and the IRS's penalty philosophy under IRC §6662 and §6663.
IRM 20.1.1 — Introduction to Penalties
Types of civil penalties the IRS can assess, how they're computed, and the general defenses available to taxpayers.
IRM 20.1.2 — Failure to File Penalty (FTF)
IRC §6651(a)(1): 5% per month on unpaid tax, up to 25%. Eliminated by filing. Abatable with reasonable cause.
IRM 20.1.3 — Failure to Pay Penalty (FTP)
IRC §6651(a)(2): 0.5% per month on unpaid balance, up to 25%. Continues accruing until paid in full.
IRM 20.1.4 — Estimated Tax Underpayment Penalty
IRC §6654: Penalty for individuals who don't pay sufficient estimated taxes. Computed quarterly.
IRM 20.1.5 — Trust Fund Recovery Penalty (TFRP)
IRC §6672: Personal liability for responsible parties who fail to collect/pay over payroll taxes. 100% penalty.
IRM 20.1.6 — Accuracy-Related Penalties
IRC §6662: 20% penalty for negligence, substantial understatement, or valuation misstatements.
IRM 20.1.7 — Fraud Penalty
IRC §6663: 75% civil fraud penalty when the IRS proves willful intent to evade tax.
IRM 20.1.8 — Preparer Penalties
Penalties imposed on tax return preparers for negligent or willful understatements of tax liability.
IRM 20.2 — Interest Provisions
Federal short-term rate + 3% (individuals). How underpayment interest is computed daily and compounds.
IRM 20.2.1 — Interest on Underpayments
IRC §6601: Interest starts from the original due date and runs until full payment. Cannot be abated for reasonable cause.
IRM 20.2.5 — Interest on Overpayments
When the IRS owes YOU interest on an overpayment they held too long (federal short-term rate + 3%).
The Detangler™ on IRM Part 20
Penalties and interest are the IRS's compound interest machine. A $10,000 debt can balloon to $18,000+ in a few years through Failure to File (5%/month), Failure to Pay (0.5%/month), and daily compounding interest. But here's what they don't advertise: First-Time Abatement alone can wipe out thousands in penalties with a single phone call. Know these rules — they're your ammunition.
Penalty Abatement Grounds
Reasonable Cause
Illness, death in family, natural disaster, reliance on professional advice, or IRS error.
First-Time Abatement (FTA)
Administrative waiver for taxpayers with 3 clean years prior. No documentation required. Most powerful tool.
Statutory Exceptions
Automatic waiver when the IRS failed to timely provide required notices or when payment was timely.
IRS Error / Incorrect Written Advice
If you relied on IRS's own incorrect written guidance, they must abate the resulting penalty under IRC §6404(f).
Interest: Key Facts
Federal short-term rate + 3% (resets quarterly)
Daily compounding from original due date
Unlike penalties, interest rarely qualifies for abatement (only for IRS error or delay)
Eliminate the underlying tax liability quickly to stop interest accrual