IRS interest rate on underpayments: how it is set and charged

What is the IRS interest rate on underpayment of tax?

Underpayment interest is the charge the IRS adds to any tax, penalty or interest you have not paid by its due date. For individuals the rate equals the federal short-term rate plus 3 percentage points, and it stands at 7% for the October to December 2026 quarter (IRS, Quarterly interest rates). Unlike a penalty, interest is not a punishment and has no cap; it simply compensates the government for the time the money was unpaid.

Businesses face slightly different figures. A corporation that owes more than $100,000 pays the large corporate underpayment rate, which is the short-term rate plus 5 points (9% for late 2026). This page focuses on the individual rate, which applies to most people with back taxes.

How the rate is set: the short-term rate plus 3 points

Each quarterly rate comes from a formula in Internal Revenue Code section 6621. The Treasury determines the federal short-term rate for the first month of each calendar quarter, and that figure applies to the next quarter. The result is rounded to the nearest full percent, with half-percent values rounded up.

In practice this means the January to March rate is based on the short-term rate measured in October, the April to June rate on the January figure, and so on. The IRS then publishes the new rates in the Internal Revenue Bulletin before the quarter starts. Because of the rounding, small moves in market rates often leave the IRS rate unchanged.

Over the last 12 quarters the individual rate has moved only between 6% and 8%: 8% throughout 2024, 7% throughout 2025, and 7%, 6%, 7% and 7% across the four quarters of 2026. Upcoming quarters and release timing are tracked on our IRS interest rate 2027 page.

Is IRS interest compounded daily?

Yes. The IRS compounds both underpayment and overpayment interest daily, so each day's interest is added to the balance and earns interest itself the next day. At 7%, daily compounding turns a simple 7% into an effective annual cost of about 7.25%.

The figures use the formula balance x ((1 + 0.07/365) to the power of days, minus 1) and assume the rate stays at 7%. Real bills also change when the quarterly rate changes and when penalties are added, which is why an IRS notice rarely matches a hand calculation to the cent. For a full estimate that includes penalties, use the IRS penalty calculator.

When does IRS interest on unpaid taxes start?

Interest on unpaid tax starts on the original due date of the return, whether or not you had an extension to file. For a tax year 2026 return, that is April 15, 2027. An extension moves the filing deadline to October 15, 2027, but not the interest start date.

Interest on penalties: the IRS penalty interest rate

The IRS charges the same rate on penalties, but the start date depends on the penalty type (IRS, Interest):

If you get a bill and pay the full amount shown by its pay-by date, the IRS does not charge more interest on that amount.

Does interest stop on a payment plan?

No. Interest keeps running on the unpaid balance for as long as any of it remains, including while you are on a short-term plan, an installment agreement or in Currently Not Collectible status. A payment plan can lower the failure-to-pay penalty rate from 0.5% to 0.25% a month for people who filed on time, but it does nothing to the interest rate.

The practical lesson: every extra dollar paid early cuts future interest. If you can borrow at less than 7% a year, paying the IRS off sooner can cost less than a long installment agreement. See how to pay back taxes for the payment channels.

Can IRS interest be removed or reduced?

Interest can be reduced only in narrow cases. The IRS says it does not remove or reduce interest for reasonable cause, even when it removes a penalty for that reason. There are three ways interest comes down:

1. The tax goes down. If an amended return, audit reconsideration or corrected notice lowers the tax, the interest on the removed amount goes with it automatically.
2. A penalty is removed. When a penalty is abated through First Time Abate, reasonable cause or automatic penalty relief, the interest charged on that penalty is reduced or removed too.
3. IRS error or delay. If interest grew because an IRS officer or employee made an unreasonable error or delay, you can ask for abatement on Form 843 or in a signed letter with documents showing the delay.

For how interest and every penalty type fit together on a bill, see the IRS penalties guide.