How the IRS Calculates Interest on Unpaid Taxes

The IRS calculates interest on unpaid taxes by applying a quarterly interest rate to your balance and compounding it daily, starting from the return’s original due date and running until you pay in full. For the first quarter of 2026, the rate for individual underpayments is 7% per year.¹ Because interest compounds every day on the tax, the penalties, and the interest already added, the balance grows a little faster with each day you wait, and the IRS will not waive interest simply because you had a good reason for paying late.²

The Current Rate and How It Changes

For January through March 2026, individuals pay 7% per year on unpaid balances, compounded daily.¹ That number is not fixed. Federal law ties the rate to the federal short-term rate the Treasury publishes each month: the IRS takes the rate from the first month of the previous quarter, rounds to the nearest whole percent, and adds 3 percentage points for individual underpayments.³ The Q1 2026 figure came from a 4% short-term rate plus that 3-point add-on.

The rate can change on the first day of each quarter, in January, April, July, and October. A debt that stays unpaid for a full year may see several different rates applied across those quarters, and a new rate only affects interest going forward. It does not retroactively adjust anything already charged.⁴ Corporations follow different formulas, and a corporate underpayment above $100,000 carries a rate 5 points over the short-term rate rather than 3.³

How Daily Compounding Works

Federal law requires that IRS interest compound daily, not monthly or annually.⁵ At the end of each day, the IRS calculates interest on the full outstanding balance: original tax, any penalties, and every prior day’s interest. That new interest then folds into the balance the next day’s charge is calculated against.⁶

Here is what that looks like in practice. Suppose you owe $10,000 on April 16, and the annual rate is 7%. The daily interest factor is about 0.07 divided by 365, or 0.00019178. Day one adds roughly $1.92. Day two calculates interest on $10,001.92, so the charge is slightly higher. After a full year at 7%, that $10,000 grows to roughly $10,725 rather than the $10,700 you would get from simple interest. The IRS does not run this math by hand; it uses standardized compounding factor tables published in Revenue Procedure 95-17 to determine the exact interest for any period and rate.⁷

The consequence is straightforward. Paying sooner costs less than paying later by more than the headline rate suggests, because each day of delay slightly increases both what you owe and the base the next day’s charge runs against.

When Interest Starts, and What Actually Stops It

Interest starts on the return’s original due date, which for individual income tax is normally April 15. Filing an extension pushes back the paperwork deadline but not the payment deadline. If you extend to October and then owe a balance, interest has been accruing since April.²

The only way to stop underpayment interest is to pay the balance in full, which means the original tax, all penalties, and all accumulated interest.⁸ Partial payments help by reducing the balance that compounds, but interest continues on whatever remains. Setting up an installment agreement does not pause anything either. Interest and penalties keep running on the unpaid portion until you reach zero.⁹ The same is true while the IRS reviews an offer in compromise.¹⁰

When you do make a payment, the IRS applies it to tax first, then penalties, then interest.⁸ That order matters, because cutting the principal down is what shrinks the daily interest charge going forward.

Interest on Penalties

Unpaid penalties accrue interest too, but the start date depends on the type of penalty.²

Failure-to-file penalty: interest runs from the return due date, or the extended due date if you filed for an extension.
Failure-to-pay penalty: interest runs from the date the IRS sends you a notice or formally assesses the penalty.
Most other assessable penalties: interest runs only from the date of the notice and demand for payment.

For that last category, there is a short grace period. Pay within 21 calendar days of the notice, or 10 business days if the amount is $100,000 or more, and the IRS charges no interest on the penalty at all.¹¹ Once interest does begin on a penalty, that penalty joins the compounding balance the same way the tax does.¹²

Can You Get the Interest Reduced?

Usually not. The IRS will not lower or waive interest because you had a reasonable excuse for paying late.² There is one narrow exception: if an IRS employee caused an unreasonable error or delay in handling your case, you can request an abatement of the interest tied to that delay. You file Form 843 or send a signed letter explaining exactly when and how the IRS caused the problem.¹³

To qualify, the error must have been a ministerial or managerial act by an IRS employee, no significant part of the delay can be your fault, and the error must have happened after the IRS first contacted you in writing about the tax issue.¹⁴

A separate rule called interest netting can help if you owe the IRS for one tax year while the IRS owes you a refund for another. When the underpayment and overpayment overlap in time, the law sets the net interest rate at zero for the overlapping period, so neither side effectively pays interest to the other during that window.¹⁵ Netting applies only to the same taxpayer, not between spouses filing separately or between a business and its owner.

A Few Things Worth Knowing

Interest you pay on a personal income tax underpayment is personal interest and is not deductible on your return.¹⁶ If the situation runs the other way and the IRS pays you interest on a refund, that interest is taxable income for the year you receive it.

The estimated tax penalty is a related but separate charge. It is calculated at the same quarterly rate as regular underpayment interest, but it does not compound daily. The statute specifically excludes it from the compounding requirement, because it is technically an addition to tax rather than interest.⁶

And on the refund side, the government owes you interest only if it takes longer than 45 days after your filing deadline (or 45 days after you file, if you file late) to send your refund.¹⁷ Inside that window, no interest is paid.

1
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
2
Internal Revenue Service. Interest
3
Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest
4
Internal Revenue Service. Quarterly Interest Rates
5
Office of the Law Revision Counsel. 26 USC 6622 – Interest Compounded Daily
6
Internal Revenue Service. 20.2.1 Interest Introduction, Standards and Guidelines
7
Internal Revenue Service. Section 6621 – Determination of Rate of Interest
8
Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
9
Internal Revenue Service. Payment Plans and Installment Agreements
10
Internal Revenue Service. Offer in Compromise
11
Office of the Law Revision Counsel. 26 U.S. Code 6601 – Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax
12
Internal Revenue Service. Penalties
13
Internal Revenue Service. Interest Abatement
14
Office of the Law Revision Counsel. 26 U.S. Code 6404 – Abatements
15
Internal Revenue Service. 20.2.14 Netting of Overpayment and Underpayment Interest
16
Internal Revenue Service. Interest, Investment, Money Transactions
17
Office of the Law Revision Counsel. 26 USC 6611 – Interest on Overpayments