Do I still accrue penalties and interest while on an IRS payment plan?

Yes, penalties and interest continue to accrue on the unpaid balance while you're on an installment agreement. However, the rates are reduced. The failure-to-pay penalty drops from 0.5% per month to 0.25% per month if you're in an approved installment agreement (and further to 0% if you file the return on time and request the agreement on the return). Interest continues at the federal short-term rate plus 3%, compounded daily (currently about 7-8% annually). This means your first few payments may not even reduce the principal balance, as they're absorbed by ongoing interest and penalties. Over the life of a 72-month installment agreement, you could pay 40-60% more than the original balance in total interest and penalties. To minimize this: choose a Direct Debit Installment Agreement (qualifies for the 0.25% reduced penalty), make the largest payment you can afford to reduce the balance faster, make additional lump-sum payments whenever possible, and consider whether an Offer in Compromise or loan might result in less total payment. Despite the ongoing interest, an installment agreement is far better than ignoring the debt and facing levies, liens, and full penalty rates.