interest while on form 9465

No. Interest is calculated on the total balance and is compounded daily at a rate that is adjustable every 3 months. The current rate is 4%.

Periodic payments are applied first to tax, then penalty, then interest for purposes of P&I calculation. The penalty applies only until the tax has been paid or the total late payment penalty charged over the life of the debt reaches 25%. While an installment agreement is in place the penalty is .25% per month.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

What is the meaning of "Periodic payments are applied first to tax, then penalty, then interest for purposes of P&I calculation"? Suppose you owe $1000. Interest is 4% a year or 4%/12 a month and penalty is

Assuming it is, it sounds like you're saying that that interest=3.33 (4% divided by 12 times 1000) penalty=2.50

Then your payment of 100 balance0 balance0+3.33+2.505.83

Now in the second month, do they charge you interest plus penalty on

Interest accrues on the entire balance, including tax, penalty & interest. Penalty accrues on only the unpaid tax. As you're paying down the account those payments first reduce tax, which means that the penalty is reduced. When the return is first filed the IRS must "assess" it. If there's an unpaid balance they also assess the P&I that have accrued up to the assessment date. This is also the date of the first balance due notice, the start of the 10 year collection period, and the date that goes on a notice of lien or levy.

Example:  

Original tax: $2,000 Penalty & Interest to the date of assessment: $250 Total assessed balance: $2,250

You make a $100 payment. In the bowels of the P&I calculating programs you now owe $1,900 of tax, plus whatever assessed and accrued P&I to date. Since the penalty is charged per month or fraction of a month when the next month comes accrued penalty will be based on $1,900, not $2,000. And so on until you've made enough payments to wipe out the original tax, at which time no more penalty accrues. Throughout interest is compounded daily.

Just plain 25% (IRC 6651(a)(2&3)). Back when it was .5% per month with none of the variations that are in the law now it was no more penalty after 50 months. Now that period can be shortened if the 1% per month rate kicks in because you ignored a final notice or lenghthened if the .25% per month rate kicks in because you're on an installment plan.

I hope I haven't confused you more. I used to spend 2 days teaching this to new revenue officers, and that was when it was 6% simple interest and .5% failure to pay with no rate variations and no compounding. Of course there were also no computers to do the work for you.

Phil Marti