What Is the IRS Interest Rate on Taxes Owed?

The IRS interest rate on taxes owed is 7% per year for individuals in the first quarter of 2026, and it compounds daily.¹ That rate has held steady since the first quarter of 2025. Interest starts the day after your return was due and keeps running until every dollar of tax, penalty, and accrued interest is paid. Penalties can sometimes be waived for reasonable cause. Interest almost never is.

How the Rate Is Set

The individual underpayment rate equals the federal short-term rate plus three percentage points.² The federal short-term rate reflects the average yield on Treasury securities maturing in three years or less, so IRS interest moves with the broader rate environment. When the Fed raises rates, owing the IRS gets more expensive.

The IRS resets the rate every calendar quarter and publishes the new figure in a Revenue Ruling about a month before the quarter begins. The current 7% rate applied throughout all of 2025 and continues into the first quarter of 2026.³ For comparison, the rate ran at 8% throughout 2024 and sat as low as 3% in early 2022. If your debt spans multiple quarters, each quarter’s rate applies only to the balance outstanding during that period.

What Daily Compounding Actually Costs

IRS interest compounds daily, not monthly or annually.⁴ The annual rate is divided by 365 (366 in a leap year), and that daily rate applies to the full outstanding balance every day, including previously accrued interest.⁵ You pay interest on your interest, every day.

On a $10,000 balance at 7%, the first day of interest is about $1.92. Small on day one. Over a year, though, daily compounding at 7% produces roughly $725 rather than the $700 simple interest would generate. The gap widens sharply over multiple years, especially when penalties are stacking on top of the underlying tax.

When Interest Starts and When It Stops

Interest begins the day after your return’s original due date, which is April 15 for most individual filers.⁶ It runs automatically. No notice, no bill, no assessment is required. If you owed money on April 16, interest was already accruing.

Filing Form 4868 gives you until October 15 to submit your return, but the extension only covers filing, not paying.⁷ People discover this every October when they see six months of interest on the balance they thought the extension had frozen. If you expect to owe, send an estimated payment with the extension request.

Interest stops when the IRS receives full payment of the tax, all penalties, and all accrued interest. For paper checks, the mailbox rule under IRC 7502 treats a payment as received on the postmark date, so a check mailed on the due date is timely even if it arrives days later. The mailbox rule does not apply to electronic payments. The IRS generally credits those on the date received and processed.⁸ EFTPS payments of $1 million or less submitted before 3 p.m. Eastern on the due date are generally treated as same-day, but submitting any electronic payment late on a deadline carries risk if processing spills to the next day.

Interest on Penalties

The IRS charges interest on most unpaid penalties, but the start date depends on which penalty is involved.

Failure-to-File Penalty

Missing the filing deadline is expensive: 5% of the unpaid tax per month, capped at 25%.⁹ Interest on this penalty runs from the return’s original due date, including any extension.¹⁰ The penalty itself gets hit with daily compounding from day one. If you owe money and cannot pay, file anyway. The failure-to-file penalty is ten times worse per month than the failure-to-pay penalty.

Failure-to-Pay Penalty

If you file on time but do not pay, the IRS adds 0.5% of the unpaid tax per month (or partial month), up to 25%.⁹ Interest on this penalty does not begin on the return’s due date. It starts running if you haven’t paid within 21 calendar days of an IRS notice and demand, or 10 business days if the penalty is $100,000 or more.¹⁰

Accuracy-Related Penalties

Penalties for substantial understatement or negligence follow the failure-to-file rule: interest accrues from the return’s due date, including extensions.¹⁰ Because accuracy-related penalties typically run 20% of the underpayment and often aren’t assessed until an audit closes years later, the retroactive interest can be substantial.

Installment Agreements Do Not Freeze Interest

An approved IRS installment agreement lets you spread payments over time. It does not reduce or pause the interest rate. Interest and penalties keep accruing on the remaining balance until it hits zero.¹¹ One concession helps: if you filed on time, the failure-to-pay penalty drops from 0.5% to 0.25% per month while the installment agreement is active.¹²

Setup fees vary by application and payment method:

Direct debit, applied online: $22
Direct debit, applied by phone or mail: $107
Other payment methods, applied online: $69
Other payment methods, applied by phone or mail: $178
Low-income taxpayers with direct debit: setup fee waived
Low-income taxpayers with other methods: $43, potentially reimbursed

Low-income waivers apply at or below 250% of the federal poverty level.¹¹ The math is sobering. On a $15,000 balance at 7% interest with the reduced 0.25% monthly penalty, you’re accruing roughly $125 per month in combined charges before touching principal. A long installment plan can cost substantially more in total than borrowing elsewhere at a lower rate.

When the IRS Owes You Interest

The rate runs both ways. When you overpay, the IRS pays you 7% for the first quarter of 2026, compounded daily, same as the underpayment rate for individuals.¹ There is a built-in delay, though. The IRS has 45 days to issue your refund without owing any interest. Interest on overpayments starts from the later of the return’s due date or the filing date, and only if the refund isn’t issued inside that 45-day window.¹³ Most e-filed refunds arrive within 21 days, so interest only becomes a factor when processing is delayed for identity verification or an error.

Getting Interest Reduced

The IRS almost never forgives interest. Abatement is limited to interest caused by an unreasonable error or delay by an IRS employee performing a ministerial or managerial act.¹⁴ No part of the error can be attributable to you, and only interest accruing after the IRS first contacted you in writing qualifies. You request abatement on Form 843, explaining how an IRS error caused the interest to accumulate.¹⁵ Claims that succeed usually involve lost correspondence, a case sitting on someone’s desk for months, or a processing error that stalled resolution. General slowness typically doesn’t qualify.

One separate relief provision is worth knowing. If you simultaneously owe money for one year and are owed a refund for another, the interest on the overlapping amounts nets to zero for the period they coexist.² Interest netting happens when the IRS processes both liabilities, but you may need to point it out if it doesn’t apply automatically.

The Effective Cost Is Higher Than 7%

Interest paid on personal federal income tax debt is personal interest, and it is not deductible on your return.¹⁶ It sits in the same bucket as credit card interest: paid with after-tax dollars, no offsetting deduction. For anyone in a meaningful tax bracket, the true cost of IRS interest is well above the stated 7%. That makes paying off the balance quickly, even by borrowing at a lower rate elsewhere, the cheaper move in most cases.

1
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
2
Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest
3
Internal Revenue Service. Quarterly Interest Rates
4
Office of the Law Revision Counsel. 26 USC 6622 – Interest Compounded Daily
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eCFR. 26 CFR 301.6622-1 – Interest Compounded Daily
6
Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
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Internal Revenue Service. Taxpayers Who Need More Time to File a Federal Tax Return Should Request an Extension
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Taxpayer Advocate Service. TAS Act: Timely Submitted Payments and Electronic Documents
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Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
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Office of the Law Revision Counsel. 26 USC 6601 – Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax
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Internal Revenue Service. Payment Plans; Installment Agreements
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Internal Revenue Service. Failure to Pay Penalty
13
Internal Revenue Service. Interest
14
Office of the Law Revision Counsel. 26 USC 6404 – Abatements
15
Internal Revenue Service. About Form 843, Claim for Refund and Request for Abatement
16
Internal Revenue Service. Interest, Investment, Money Transactions