Interest on a 1099 penalty and on a Form 945 balance: when it starts, the 21-day window, and what cannot be abated

When interest starts, by what was assessed

The table explains two things payers find counter-intuitive. First, a 972CG that arrives in August for January returns carries no interest for the months in between: "The date from which interest will begin to accrue on an assessable penalty ... varies by penalty type. Some penalties begin to accrue interest on the date of notice and demand (i.e., assessment date/23C date)" (IRM 20.2.5.3, July 8, 2025), and the information-return penalty, a TC 240 with a penalty reference number outside the 680-series and 786-792 exceptions, is one of those. Interest starts when the CP15 or CP215 is issued. Second, a failure-to-file penalty on a late Form 945 is the opposite case: interest on it runs "from the return due date or extended return due date whichever is later," so a 945 filed in October carries interest on the penalty back to January 31 even though the penalty itself was assessed in October. The manual notes that for those penalties "the terms 'return due date' and 'extended due date' include any authorized postponements under IRC 7508 ... or IRC 7508A," so a disaster postponement moves the interest start on the Form 945 penalty, though not on the 1099 penalty, which never used the due date.

Tax assessed on the Form 945 module itself, by a compliance check or a field examination, is an underpayment of tax, and underpayment interest runs from the return's due date to the date of payment under IRC 6601(a), subject to the Form 945 rule below.

The 21-day window after notice and demand

The window is the reason to decide quickly on a penalty you intend to pay. It does not stop interest that has already started on an older balance, and it does not apply to amounts not shown on the notice. A payer that disputes a CP215 and loses in Appeals is billed again, with a new notice and demand and a new window for the amount then due, but the interest from the first assessment date to that payment is owed. The abatement and claim page covers the choice between contesting an unpaid penalty and paying it to claim a refund; interest is the cost of the first route if it fails.

Form 945: the one interest-free route

The interest manual's list of interest-free periods includes "Employment Tax Returns per IRC 6205: Allows an underpayment interest-free period from the original due date until the received date of the adjusted return or agreement, if the tax is paid in full" (IRM 20.2.7.2, Dec. 20, 2023). That is the rule behind two facts stated elsewhere on this site: an increase reported on a Form 945-X is interest-free only if filed by the due date of the return for the period in which the error was found and paid with it, and an examination assessment is interest-free only if the signed Form 2504 and the payment arrive together, because "An error is considered ascertained on the date the signed Form 2504 or Form 2504-WC is received by the IRS" (IRM 21.7.2.5.8, Jan. 14, 2015). Miss either and underpayment interest runs from January 31 of the year after the withholding. The Form 945-X page has the dates.

What can and cannot be abated

Two kinds of interest relief exist and payers routinely ask for the wrong one. Abatement for IRS error or delay under IRC 6404(e)(1) covers "an unreasonable error or delay in performing a ministerial or managerial act," only for the period after "the date the IRS contacts the taxpayer in writing," and only for the income, estate, gift and certain excise taxes listed in IRC 6212(a). A Form 945 balance is outside it by statute. An information-return penalty is not a tax described in IRC 6212(a) either; the manual's example of a qualifying case is an income tax audit. So a payer whose 972CG response sat for a year while interest ran on the assessed penalty has no 6404(e) claim; the remedy for that delay is the Taxpayer Advocate, before the interest accrues, and the 21-day window after the bill.

Correction under IRC 6404(a) is different and always available: interest "which is excessive in amount, or is assessed after the statutory period of limitations has expired, or is erroneously or illegally assessed" is abated, and "IRS employees are obligated to correct interest errors discovered on taxpayer accounts without the taxpayer having to file a request" (IRM 20.2.7.3, Dec. 20, 2023). Interest computed on a penalty that was later abated, interest run from the wrong start date, interest on a balance that a misapplied deposit should have covered: those are corrections, and the credit transfer page describes the commonest cause. When the underlying penalty is removed, the interest on it goes with it, applied "first ... to the earliest assessment of that penalty in the order of first-in, first-out" (IRM 20.2.5.3).

What to do with this

• Read the assessment date on the notice. For a CP15 or CP215 it is also the interest start date; nothing accrued before it.
• Decide within 21 days. Pay inside the window to owe the penalty alone, or contest and accept interest on whatever survives. For amounts of $100,000 or more the window is 10 business days.
• On a Form 945 adjustment, send the payment with the agreement or the 945-X. The IRC 6205 interest-free period ends on the day the IRS receives the signed form.
• Do not file for 6404(e) relief on a 945 or a 1099 penalty. It is excluded by statute for the first and inapplicable to the second; ask for correction under 6404(a) where the computation is wrong, and use TAS for delay.
• Check the transcript for TC 340. Restricted interest means a manual computation; those are where errors live. The transcript page shows the codes.

Questions people ask