Internal Revenue Code Section 6601: Interest Rates and Suspension

IRS interest on unpaid taxes accrues automatically from the original due date of the return until the balance is paid in full, and it compounds daily. For the first quarter of 2026, the rate on individual underpayments is 7 percent; it drops to 6 percent for the second quarter beginning April 1, 2026.¹ The charge is not a penalty. It reflects the time value of money the government was owed but didn’t have, and because it’s set by statute under IRC Section 6601, the IRS cannot waive it the way it sometimes waives penalties for reasonable cause.²

When the Clock Starts

Interest starts running on the original due date of the return, whether or not you filed an extension.³ Filing Form 4868 buys you six extra months to submit the paperwork, but it does nothing for the payment deadline. The form itself says interest will be charged on any amount paid after the original due date “without regard to the extension.”⁴

The same rule applies when an audit turns up additional tax. You may not learn about the underpayment for years, but the interest reaches back to the original due date of the return. By the time an audit wraps up, accumulated interest can rival the additional tax itself.

How the Rate Is Set

The underpayment rate is not fixed. Under IRC Section 6621, the IRS recalculates it every calendar quarter by taking the federal short-term rate and adding three percentage points.⁵ The federal short-term rate reflects current yields on short-term U.S. Treasury obligations, so the underpayment rate moves with broader interest conditions.

A higher rate applies to large corporate underpayments. When a C corporation owes more than $100,000 for a given period, the rate jumps to the federal short-term rate plus five percentage points instead of three.⁵ That two-point premium adds up quickly on six- and seven-figure balances.

Why Daily Compounding Matters

Interest on unpaid tax compounds daily under IRC Section 6622. The IRS divides the annual rate by 365 (or 366 in a leap year) and applies that daily rate to the outstanding balance each day, including previously accrued but unpaid interest.⁶ A $10,000 balance at 7 percent does not simply add $700 over twelve months. Each day’s interest gets folded into the next day’s calculation, so the actual cost runs slightly higher, and the gap widens the longer the balance sits.

One exception: daily compounding does not apply to the estimated-tax penalties under Sections 6654 and 6655.⁶ Those are computed using a simpler method.

Interest on Penalties Works Differently

Interest applies not just to unpaid tax but to most penalties and additions to tax as well. The timing is different, though. Interest on a penalty generally does not start running from the original return due date. It starts from the date the IRS issues a notice and demand for payment, and only if you don’t pay within 21 calendar days of that notice (10 business days when the notice amount is $100,000 or more).² Pay within that window and no interest attaches to the penalty at all.

So the underlying tax and the associated penalty often have very different interest start dates. The tax accrues interest from the original due date; a late-filing or accuracy penalty may not start accruing interest until the IRS sends a bill years later.⁷

Ways to Stop or Limit the Interest

Pay in Full

The most direct way to stop the clock is to pay the full balance. Interest runs “to the date paid,” so every day you wait adds cost.² If you’re in a dispute and expect to owe additional tax, paying the contested amount now and pursuing a refund later is almost always cheaper than letting interest compound while you argue.

Pay Within 21 Days of a Notice

When the IRS sends a notice and demand for payment of a deficiency, you get a short grace period. Pay within 21 calendar days of the notice date (or 10 business days if the amount is $100,000 or more) and no interest accrues on that amount for the period between the notice and your payment.² Interest that ran before the notice is unaffected, but acting quickly avoids stacking more on top.

Make a Section 6603 Deposit

If you’re facing a potential deficiency but don’t want to concede that you owe the money, you can make a cash deposit with the IRS under IRC Section 6603 to stop interest from running while the dispute plays out. If the IRS ultimately determines you do owe additional tax, the deposit is applied to the liability and treated as having been paid on the date you made the deposit, eliminating interest for the deposit period.⁸ If the dispute goes your way, you can request the deposit back in writing.

The paperwork matters. The deposit must be accompanied by a written statement designating it as a deposit (not a payment), identifying the type of tax, the tax year, and the amount of “disputable tax” involved.⁹ An undesignated remittance will be treated as a payment and applied to your earliest outstanding liability, which means you lose the flexibility to get it back.

There’s a tradeoff. If the deposit is returned to you because you didn’t owe the additional tax, the interest the IRS pays you on the returned amount is calculated at the federal short-term rate alone, without the three additional percentage points that apply to normal overpayment interest.⁸ You’re essentially lending money to the government at a below-market rate in exchange for stopping the interest clock.

Abatement for IRS Errors or Delays

Section 6601 interest is generally non-negotiable, but a separate provision, IRC Section 6404(e), allows the IRS to abate interest that accumulated because of unreasonable errors or delays by its own employees.¹⁰ The error or delay must involve a “ministerial or managerial act” performed in an official capacity. A ministerial act is a procedural or mechanical step that doesn’t involve judgment, like transferring a file or mailing a deficiency notice after all reviews are complete. A managerial act involves administrative decisions like reassigning personnel or granting extended leave without reassigning the case.¹¹

Two conditions apply. No significant part of the error or delay can be the taxpayer’s fault, and abatement is only available for interest that accrued after the IRS first contacted the taxpayer in writing about the deficiency.¹⁰ Interest that ran before that initial contact is not eligible, even if the IRS was the source of the delay. To request abatement, file Form 843 and check the box for abatement of interest under Section 6404(e)(1).¹²

The provision doesn’t reach every delay. If the IRS decides to postpone your case to examine a related tax shelter, or chooses to prioritize another return whose statute of limitations is about to expire, those are judgment calls, not ministerial or managerial acts, and they don’t qualify for abatement.¹¹

Automatic Suspension After 36 Months

Individual taxpayers get an additional safeguard under IRC Section 6404(g). If you file your return on time (including extensions) and the IRS does not send you a notice specifically identifying the liability and its basis within 36 months of the later of your filing date or the unextended due date, interest is suspended for the period after that 36-month window until 21 days after the IRS finally sends the required notice.¹⁰ The suspension applies automatically. You don’t need to file anything to claim it.

The protection has important limits. It doesn’t cover tax you reported on the return but failed to pay, cases involving fraud or criminal penalties, gross misstatements, or certain reportable and listed transactions.¹⁰ It also resets if you provide signed written documents to the IRS showing you owe additional tax; the 36-month clock starts over from the date of the last document you submitted. Even so, for a straightforward audit that drags on for years, this rule can eliminate a significant chunk of interest.

An Installment Agreement Does Not Stop Interest

A common misconception is that setting up a payment plan freezes interest. It does not. Interest and penalty charges continue to accrue on the unpaid balance until it is paid in full, even while you are making regular installment payments.¹³ An installment agreement prevents enforced collection actions like levies, but it does nothing to reduce the cost of carrying the balance. If you can borrow money at a rate lower than the IRS underpayment rate to pay off the tax in full, you’ll come out ahead financially.

1
Internal Revenue Service. Internal Revenue Bulletin No. 2026-8
2
Office of the Law Revision Counsel. 26 USC 6601 – Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax
3
Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
4
Internal Revenue Service. Form 4868 – Application for Automatic Extension of Time to File U.S. Individual Income Tax Return
5
Office of the Law Revision Counsel. 26 U.S. Code 6621 – Determination of Rate of Interest
6
Office of the Law Revision Counsel. 26 USC 6622 – Interest Compounded Daily
7
Internal Revenue Service. Program Manager Technical Advice 2020-07
8
Office of the Law Revision Counsel. 26 U.S. Code 6603 – Deposits Made to Suspend Running of Interest on Potential Underpayments, Etc.
9
Internal Revenue Service. Revenue Procedure 2005-18
10
Office of the Law Revision Counsel. 26 USC 6404 – Abatements
11
Internal Revenue Service. IRM 20.2.7 – Abatement and Suspension of Underpayment Interest
12
Internal Revenue Service. Instructions for Form 843, Claim for Refund and Request for Abatement
13
Internal Revenue Service. Payment Plans; Installment Agreements