Alabama Late Payment Penalty: Rates, Interest, and Waivers

Alabama’s late payment penalty is 1% of the unpaid tax for each month or partial month you’re late, capped at 25% of what you owe.¹ Daily interest runs on top of it at the federal underpayment rate, and if you also filed the return late, a separate filing penalty stacks on. The Department of Revenue can waive the penalty if you show reasonable cause, but the burden is on you to ask and to document why.

How the Late Payment Penalty Is Calculated

For most Alabama taxes, including individual income tax, the penalty adds 1% of the unpaid balance for each month or fraction of a month that the payment is late, up to a maximum of 25%.¹ Even a single day into a new month counts as a full month, so a payment that is one week late is treated the same as one that is three weeks late. It takes just over two years of nonpayment for the penalty to hit the 25% cap.

A different rule applies to taxes that require monthly or quarterly returns, and to taxes where no return is required. In those cases, Alabama imposes a flat 10% penalty on the unpaid amount rather than the incremental monthly charge.¹ This structure hits businesses remitting sales tax and similar periodic obligations all at once, rather than letting the charge build gradually.

Interest on the Unpaid Balance

The penalty isn’t the only thing growing while a balance sits unpaid. Alabama charges interest daily on any unpaid tax, at an annual rate tied to the federal underpayment rate under 26 U.S.C. § 6621. For the first quarter of 2026, that rate is 7%.² To calculate what you owe on a given day, divide the annual rate by 365, then multiply by the days late and the tax balance.

The rate resets quarterly, so a balance that carries across several quarters may be charged at different rates during different periods. Interest keeps running even after you enter a payment plan, and it applies on top of whatever penalties have been assessed. One exception sits outside this framework: delinquent ad valorem (property) taxes carry a fixed 12% annual interest rate regardless of the federal rate.³

When Late Filing Stacks on Top

Paying late and filing late are treated as two separate violations, and Alabama can charge both at once. The late filing penalty is the greater of 10% of the additional tax due or $50, and it applies even to small balances because of the $50 floor.¹ For individual income tax returns where no tax is owed at the time of filing, the late filing penalty doesn’t apply, so a return submitted a few weeks past the deadline with no balance due won’t trigger it.

Where a real balance is involved and both violations occur, the late filing penalty, the late payment penalty, and daily interest all run on the same return for the same period. Filing on time and paying what you can, even if you can’t pay everything, cuts off the late filing charge and limits the damage to the payment side.

Waiving the Late Payment Penalty

Alabama law allows the Department of Revenue to waive penalties when a taxpayer shows reasonable cause, and the statute defines reasonable cause broadly to include situations where the taxpayer acted in good faith.¹ The Department doesn’t investigate whether you had a good reason on its own. You have to raise it, and you have to back it up.

Circumstances that typically support a reasonable-cause request include serious illness or a death in your immediate family, a natural disaster, loss of access to records you needed, or a system failure that blocked electronic filing or payment. Documentation matters. Hospital records, a doctor’s letter with specific dates, insurance claims from a storm, or screenshots of an error page all give the Department something concrete to review. Saying you forgot or were too busy generally won’t clear the bar.

A narrower provision lets the Commissioner preserve a statute-allowable discount, such as a timely-payment discount on certain taxes, when you paid on time but the return itself was delayed for justifiable reasons.¹ That relief protects the discount rather than wiping out a penalty, but for businesses whose margins depend on those discounts it can matter as much as a waiver.

Payment Plans When You Can’t Pay in Full

If the balance is more than you can pay at once, the Department of Revenue offers payment plans at its discretion for liabilities that have reached final assessment. You can request one by calling the Collection Services Division at 334-242-1220 or by using the My Alabama Taxes online portal.⁴

A plan stops enforcement action but doesn’t stop the interest clock, so the total you pay will exceed the original balance. The Department may require you to complete a Collection Information Statement documenting your finances, and submitting the form isn’t a guarantee of approval. Defaulting on an agreed plan lets the Department resume collection immediately.⁴ Paying as aggressively as your budget allows is always cheaper than stretching the plan out.

What Happens If You Ignore the Balance

Once assessed, penalties and interest are collected the same way as the underlying tax.¹ The Department of Revenue can file liens against your property, levy bank accounts, and garnish wages to satisfy an unpaid balance.

Alabama also participates in the federal Treasury Offset Program, which matches state tax debts against federal payments. An unpaid Alabama balance can result in the interception of your federal tax refund.⁵ To check whether a state debt might reduce a federal refund you’re expecting, call the Bureau of the Fiscal Service at 800-304-3107.⁶

1
Alabama Legislature. Alabama Code 40-2A-11 – Civil Penalties Levied in Addition to Other Penalties
2
Alabama Department of Revenue. Quarterly Interest Rates
3
Alabama Legislature. Alabama Code 40-5-9
4
Alabama Department of Revenue. Individual Payment Plans
5
U.S. Department of the Treasury, Bureau of the Fiscal Service. Treasury Offset Program
6
Taxpayer Advocate Service. How to Prevent a Refund Offset