How Does the IRS Calculate Interest on Unpaid Taxes?
Paying the tax bill late doesn’t just mean a one-time added fee — the IRS charges interest every day the balance remains unpaid. This article explains how the IRS determines the interest rate, how daily compounding works, how interest interacts with penalties and payment plans, and practical steps you can take to reduce the total cost.
The legal and practical basis
Interest on unpaid federal taxes is set under the Internal Revenue Code and updated quarterly; the IRS posts the current rates on its website each quarter (for example, see IRS “Interest” and “Interest Rates” pages). Interest is intended to compensate the government for the time value of money when taxes go unpaid and to encourage timely payment. Unlike many penalties, interest generally cannot be waived and continues to accrue until the full liability (including penalties and interest) is paid in full (IRS — Interest, irs.gov/payments/interest).
Authoritative references:
- IRS — Interest (https://www.irs.gov/payments/interest)
- IRS quarterly interest rate announcements (search “interest rates” at irs.gov)
How the IRS sets the rate
- The statutory structure ties the IRS interest rate to the federal short-term rate determined by the Treasury, plus a statutory percentage point adjustment. In practice the IRS announces the specific annual rates each quarter.
- Rates change quarterly and can apply differently for overpayments vs. underpayments and for corporations vs. non-corporate taxpayers. Always check the IRS page for the current percentages for the quarter in question.
To find the current and recent historical rates, use the IRS interest-rate page linked above or search for “IRS interest rates” on irs.gov.
How interest is calculated (step-by-step)
- Determine the unpaid principal: this is the tax due (including any additional tax assessed later) plus previously assessed penalties and interest that have not been paid.
- Find the applicable annual interest rate for the period in question on the IRS site (it’s set quarterly).
- Convert the annual rate to a daily rate:
- Daily rate = Annual rate ÷ 365
- Apply the daily rate each day to the outstanding balance and compound daily. The math on a single-day compounding step is:
- New balance = Previous balance × (1 + daily rate)
If you want to calculate the total interest for a block of days without iterating day-by-day, the approximate formula is:
- Interest ≈ Principal × [(1 + annual_rate/365)^days − 1]
Example (hypothetical):
- Unpaid tax principal: $5,000
- Annual interest rate: 7% (hypothetical — check IRS for current rate)
- Daily rate = 0.07 / 365 ≈ 0.00019178
- After 90 days, compounded daily: 5,000 × (1 + 0.00019178)^90 ≈ $5,000 × 1.0175 ≈ $5,087.50
- Interest accrued ≈ $87.50
This example shows how daily compounding increases the cost versus simple interest.
When interest starts and what it applies to
- Interest generally begins accruing on unpaid tax from the original due date of the return (not the extended filing date). So, an extension to file does not extend the date to pay unless you obtain specific payment relief.
- Interest is charged on the tax, on assessed penalties, and on previously assessed interest (because it compounds). The IRS applies interest to the entire unpaid balance.
Reference: IRS general guidance on interest assessments (irs.gov/payments/interest).
Interest vs. penalties — how they interact
- Interest is separate from failure-to-file and failure-to-pay penalties. Penalties are typically calculated as a percentage of the unpaid tax and can be charged monthly up to maximum caps.
- The IRS generally charges interest on both the unpaid tax and on the penalties once they’re assessed. See FinHelp’s coverage of how the IRS applies interest vs penalties for a deeper look: “How the IRS Applies Interest vs Penalties on Late Tax Payments” (FinHelp internal link: https://finhelp.io/glossary/how-the-irs-applies-interest-vs-penalties-on-late-payments/).
What happens if you enter an installment agreement?
Entering an IRS installment agreement does not stop interest from accruing. The IRS will typically continue to charge interest on the outstanding balance while you make payments, and in many cases penalties may continue to accrue as well (though some penalty relief or reduced penalty rates may be available depending on the agreement). For practical guidance on installment plans and how they affect monthly payments, see FinHelp’s guide to installment agreements: “IRS Installment Agreements: How to Get a Reduced Monthly Payment” (FinHelp internal link: https://finhelp.io/glossary/irs-installment-agreements-how-to-get-a-reduced-monthly-payment/).
If your account is in an offer-in-compromise or another collection status, interest treatment may differ; always verify with the IRS or a tax professional before relying on a single approach.
Common scenarios and calculations
- Small individual balance unpaid after filing
- Short delay (30 days): Interest will be small but grows daily. If you can pay within days or a few weeks, the total interest is usually modest.
- Mid-size balance and several months unpaid
- Several months’ compounding is where the cost becomes material. Use the compound formula above or the IRS online calculators when available.
- Payroll or trust fund taxes
- Trust fund and payroll taxes can attract different penalties and serious collection activity. Interest still accrues and can compound quickly. If you have unpaid payroll taxes, act promptly and consult a professional.
Professional tips to limit interest costs
- Pay as much as you can as soon as you discover an unpaid balance. Because interest compounds daily, even a partial payment reduces the base that future interest compounds on.
- If you legitimately can’t pay in full, apply for an installment agreement quickly. While interest will still accrue, an arrangement reduces collection actions and spreads payments. See FinHelp’s installment agreement articles for options and negotiation tips (linked above).
- File your return on time even if you can’t pay — filing late can trigger larger failure-to-file penalties that add to the balance and therefore to the interest charged.
- For taxpayers who believe the IRS made an error in assessing tax or interest, pursue a formal review or protest quickly. Interest generally continues until corrected or paid.
- Penalty abatement may be available for reasonable cause; interest abatement is rare and usually limited to cases where IRS error or delay caused the charge (see IRS guidance on penalties and relief).
What the IRS won’t do (and rare exceptions)
- The IRS rarely waives interest simply because you cannot pay. Interest is considered statutory and continues until paid. In limited circumstances where IRS delays, errors, or other agency actions caused a taxpayer’s overpayment or erroneous interest, the IRS may adjust account balances. Consult the IRS guidance or a tax professional for those narrow cases (see IRS — Interest).
Practical resources and how to get current rates
- Check the IRS interest page for the published quarterly rates: https://www.irs.gov/payments/interest
- Review IRS notices carefully: the IRS will show how much interest has accrued on your balance and the date through which interest is calculated on each notice.
If you want step-by-step help for your specific account, contact a CPA, enrolled agent, or tax attorney. I often recommend gathering the IRS notice and recent account transcripts before the first consultation — the transcript will show exact interest calculations the IRS used.
Quick FAQ (concise answers)
- When does interest start? From the original due date of the return, not the extended filing date.
- Does interest compound? Yes — the IRS compounds interest daily.
- Can the IRS waive interest? Generally no; interest is statutory and rarely waived, except in limited cases tied to IRS error.
- Where can I find the current rate? On the IRS website under interest rates (irs.gov/payments/interest).
Disclaimer
This article provides general information on how the IRS calculates interest on unpaid federal taxes and is not a substitute for personalized tax advice. Rules change and your situation may affect how interest is applied. For advice specific to your circumstances, consult a licensed tax professional or the IRS directly.
Authoritative sources and further reading
- IRS — Interest: https://www.irs.gov/payments/interest
- For related FinHelp content: “How the IRS Applies Interest vs Penalties on Late Tax Payments” (https://finhelp.io/glossary/how-the-irs-applies-interest-vs-penalties-on-late-payments/) and “IRS Installment Agreements: How to Get a Reduced Monthly Payment” (https://finhelp.io/glossary/irs-installment-agreements-how-to-get-a-reduced-monthly-payment/).
If you’d like, I can add downloadable worksheets that show the day-by-day compounding math in a spreadsheet format or walk through a custom calculation using your exact dates and balances.
