IRS Underpayment Interest Rate: Calculation, Compounding, and Relief

The IRS underpayment interest rate for the second quarter of 2026 is 6% a year for individuals and most corporations, and 8% for large corporate underpayments. The rate is built from the federal short-term rate plus a fixed statutory margin, reset every three months, and compounded daily on your unpaid balance starting the day after the original payment deadline.¹

Current Rates for 2026

Two rate schedules have applied so far this year:

Q1 2026 (January through March): 7% for individual and standard corporate underpayments; 9% for large corporate underpayments.
Q2 2026 (April through June): 6% for individual and standard corporate underpayments; 8% for large corporate underpayments.¹

The trend has been downward. The underpayment rate sat at 8% across all four quarters of 2024, dropped to 7% for all of 2025, and stepped down again in the second quarter of 2026.² A two-point swing between Q4 2024 and Q2 2026 cuts daily accrual by about a quarter on the same balance.

How the Rate Is Calculated

Every quarter’s rate starts with the federal short-term rate, which reflects the average yield on U.S. Treasury securities maturing in three years or less. The IRS then adds a statutory margin on top:

Individuals and standard corporations pay the federal short-term rate plus 3 percentage points.
Large corporate underpayments carry the federal short-term rate plus 5 percentage points.³

The “large corporate underpayment” label applies only to C corporations that owe more than $100,000 in tax for a single taxable period. Individual taxpayers pay the lower margin no matter how much they owe.³

Once the short-term rate and margin are added, the result is rounded to the nearest whole percent, with half-percent figures rounded up. A 6.5% raw figure becomes a 7% published rate.³

How Often the Rate Changes

The IRS recalculates the underpayment rate four times a year. New rates take effect on January 1, April 1, July 1, and October 1. Each quarter’s rate is locked in using the federal short-term rate from the first month of the preceding quarter, so the rate that started April 1, 2026 was set using January 2026 figures.³ Upcoming rates are announced through Revenue Rulings published in the Internal Revenue Bulletin, usually a few weeks before the new quarter begins.²

When Interest Starts and How It Compounds

Interest begins accruing the day after the original payment deadline. For most individual filers, that is April 16, 2026 for tax year 2025 returns due April 15.⁴ A six-month filing extension does not extend the payment deadline. If you file in October but did not pay in April, roughly six months of interest have already accrued.⁵

The interest compounds daily. Each day, the IRS divides the annual rate by 365 (366 in a leap year), applies that daily factor to the full outstanding balance including previously accrued interest, and adds the result to what you owe.⁶ From day two onward, you are paying interest on interest. On a $10,000 balance at 6%, the first day adds roughly $1.64, and the figure creeps up as the base grows.

This is why partial payments matter. Every dollar sent in reduces the principal that the next day’s calculation runs against. The IRS applies payments to the oldest tax, penalty, and interest balances first.

Interest Keeps Running During a Payment Plan

Setting up an installment agreement does not pause interest. Both short-term and long-term plans continue to accrue penalties and interest until the balance is paid in full.⁷ The financial benefit of a plan is a reduced failure-to-pay penalty rate and protection from more aggressive collection, not a discount on the debt itself.

A taxpayer paying off a $15,000 balance over 72 months at 6% will pay noticeably more than $15,000 by the time the plan closes. If a lump sum from savings or a lower-rate loan is available, the arithmetic often favors using it.

How Interest Stacks With Penalties

Interest is not the only charge running on an unpaid balance. The failure-to-pay penalty accrues at 0.5% of the unpaid tax per month, or any part of a month, capped at 25% of the balance.⁸ Two situations change that 0.5% figure:

With an approved installment agreement and a timely-filed return, the penalty drops to 0.25% per month.
After a notice of intent to levy, if you do not pay within 10 days, the penalty rises to 1% per month.⁸

The failure-to-file penalty is much steeper at 5% per month. When both penalties apply in the same month, the failure-to-file amount is reduced by the failure-to-pay amount, so filing on time even when you cannot pay is almost always the right move.⁸ Interest runs on top of whichever penalties apply.

When the IRS Will Reduce or Suspend Interest

The IRS rarely abates interest. Reasonable cause, financial hardship, and ignorance of the law are not grounds. A few narrow situations do allow relief.

IRS Errors or Unreasonable Delays

If interest accrued because of an IRS employee’s error or unreasonable delay in a ministerial or managerial act, the agency can abate the portion attributable to the mistake, provided the taxpayer did not significantly contribute to the problem. Abatement on these grounds covers only interest accruing after the IRS first contacts the taxpayer in writing about the matter.⁹

Late Notice to Individual Filers

Individual taxpayers who file on time get a statutory protection. If the IRS determines additional tax is owed but fails to send a notice explaining the liability within 36 months of the later of the filing date or the return’s due date without extensions, interest is suspended for the period between the end of that 36-month window and 21 days after the notice finally goes out.¹⁰ The suspension does not apply to fraud, tax reported on the return itself, failure-to-file penalties, or undisclosed reportable transactions.

Erroneous Refunds

If the IRS mistakenly sends a refund of $50,000 or less and the taxpayer did not cause the error, the agency must waive interest when it recovers the money. For erroneous refunds above $50,000, abatement is discretionary.⁹

Steps That Actually Reduce What You Pay

Every effective strategy comes down to shrinking the balance that compounds daily and doing it early.

Pay whatever you can by April 15, even if it is not the full amount. Cutting the balance by a third cuts daily accrual by a third.
File on time regardless of ability to pay. Filing stops the 5% monthly failure-to-file penalty from running. Interest still accrues, but the penalty savings are large.
Request an installment agreement. It does not stop interest, but it halves the failure-to-pay penalty and prevents levies.
Send extra when possible. Installment agreements set a minimum payment, not a maximum, and any additional amount reduces the compounding base.
Watch the quarterly rate. Rates have been drifting down since late 2024, but the accrual never stops until the balance hits zero.

Interest on unpaid federal taxes is not deductible for individuals. It compounds every day, the IRS has essentially unlimited time to collect, and there is no statutory forgiveness for a taxpayer who simply cannot afford to pay. Treating a federal tax balance the way you would treat any high-rate debt, and prioritizing it accordingly, is the most reliable way to keep the total from growing.

1
Internal Revenue Service. Internal Revenue Bulletin 2026-8
2
Internal Revenue Service. Quarterly Interest Rates
3
Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest
4
Internal Revenue Service. IRS Opens 2026 Filing Season
5
Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
6
Office of the Law Revision Counsel. 26 USC 6622 – Interest Compounded Daily
7
Internal Revenue Service. Payment Plans – Installment Agreements
8
Internal Revenue Service. Failure to Pay Penalty
9
Internal Revenue Service. 20.2.7 Abatement and Suspension of Underpayment Interest
10
Office of the Law Revision Counsel. 26 U.S. Code 6404 – Abatements