There are two things that get added to the balance due while you pay off the tax liability. One is the late payment penalty. When you enter into an installment agreement before the IRS sends you a notice of intent to levy (what the IRS calls the final notice) your late payment penalty is quite low, just ¼% per month, or 3% per year. That penalty is computed on just the outstanding tax portion of the liability and is not compounded. The second addition is interest. Interest runs on the entire balance owed (tax, penalty and interest) and is compounded daily. The interest rate can change each quarter depending on the change in short term federal rates. Currently the interest rate is 4%. Since it compounded daily, that works out to be an annual effective interest rate of 4.08%. So, as a rough approximation you can figure that the penalty and interest together are running at about 7.08% — that’ll be a bit a high, but will give you a general idea of what you are looking at.

