Can IRS interest ever be waived?

Generally no. Unlike penalties, IRS interest cannot be waived except in very limited circumstances — primarily when the interest results directly from an IRS error or unreasonable delay. By law, the IRS cannot abate interest simply because you have reasonable cause or good faith, unless the underlying penalty that caused the interest is also abated. If you have penalties removed through First-Time Abatement or reasonable cause, the related interest on those penalties is automatically reduced as well.

Does interest stop accruing when you set up a payment plan?

No. IRS interest continues to compound daily on any unpaid balance throughout the duration of an installment agreement. Interest accrues until the balance is paid in full. Setting up a payment plan does stop the IRS from taking enforced collection actions and reduces the failure-to-pay penalty rate from 0.5% to 0.25% per month, but it does not pause or stop interest.

Does IRS interest compound on unpaid penalties too?

Yes. The IRS charges interest not just on unpaid tax but also on unpaid penalties. If you have a $5,000 penalty that you have not paid, interest accrues on that $5,000 in addition to the interest on the underlying unpaid tax. This compounding effect — interest on tax, interest on penalties, and interest on the interest — is why unpaid IRS balances can grow significantly faster than most people expect.

How does IRS interest work?