Overview

When you don’t pay taxes by the due date, the IRS charges interest on the unpaid balance. That interest is set quarterly and, importantly, is compounded daily — meaning each day’s interest becomes part of the balance that can earn interest the next day. Understanding the IRS method lets you calculate a precise charge and make smarter decisions about partial payments, payment plans, or penalty abatement requests.

In my practice as a tax consultant, I’ve seen clients underestimate how fast interest accumulates when they assume simple interest. A short delay can turn into hundreds or thousands more owed if the unpaid balance is large. Below I explain the exact formula the IRS follows, offer a simple approximation you can use for quick estimates, walk through examples, and provide practical tips to reduce interest costs.

Sources: Internal Revenue Service — “Interest Rates for Underpayments and Overpayments of Taxes” (IRS.gov). The IRS explains that interest rates are set quarterly and interest is compounded daily. See IRS guidance for current rates.

The IRS rule in plain language

  • Interest is assessed on any unpaid federal tax from the due date of the return until the date of payment.
  • The IRS sets interest rates each quarter; for individual underpayments the rate is typically the federal short-term rate plus 3 percentage points (different rates can apply for corporations or certain large corporate underpayments).
  • Interest is compounded daily: the unpaid balance plus accrued interest at the end of each day becomes the basis for the next day’s interest (IRS.gov).

Because of daily compounding, the IRS calculation is best expressed with a compound interest formula rather than a simple interest approximation.

Precise formula the IRS effectively uses

Let:

  • P = principal unpaid tax (dollars)
  • r = annual IRS interest rate as a decimal (for example, 0.07 for 7%)
  • d = number of days overdue

Daily rate = r / 365

Exact (compound) interest after d days:

Interest = P * ((1 + r/365)^{d} – 1)

Total owed = P + Interest

This formula reflects daily compounding. For large d or higher r, the compounded amount differs meaningfully from the simple-interest estimate.

Simple approximation (fast estimate)

For a quick, close-enough estimate when d is small, you can use simple interest:

Approximate Interest = P * r * (d / 365)

This is easier mentally but understates the charge slightly because it ignores compounding. For short periods (a few days or weeks) the difference is usually small; for months or years it grows.

Step-by-step example (compound calculation)

Assume:

  • Unpaid tax (P) = $5,000
  • Annual IRS rate (r) = 7% (0.07) — example only; check the current quarterly rate on IRS.gov
  • Days overdue (d) = 90

Daily rate = 0.07 / 365 = 0.00019178 (approx.)

Interest = 5000 * ((1 + 0.00019178)^{90} – 1)

Compute (1 + daily rate)^{90} ≈ 1.0174 (calculator required)

Interest ≈ 5000 * (0.0174) = $87.00 (rounded)

Total owed ≈ $5,087.00

Compare with the simple estimate:
Simple interest = 5000 * 0.07 * (90/365) ≈ 5000 * 0.01726 ≈ $86.30

The difference here is small ($0.70) for 90 days, but compounding increases the interest over longer periods.

Why compounding matters

  • Over a year or more, the compounded amount will exceed the simple estimate by a measurable margin.
  • If penalties (separate from interest) are added to the balance, future interest accrues on penalties too unless the IRS specifies otherwise. That can accelerate growth of the total amount owed.

For more on penalties and how they interact with interest, see our glossary entries on tax penalty abatement and on the penalty for failure to pay taxes: Tax Penalty Abatement and What is the penalty for failure to pay taxes?.

Common scenarios and how to calculate

  • Single late payment for a recent tax bill: use the compound formula with d equal to the number of days late.
  • Tax debt over multiple quarters with different IRS rates: break the calculation into date ranges that match the IRS quarterly rate changes and apply the compound formula for each interval using each period’s r. Roll the balance forward (interest is compounded daily and becomes part of the next period’s principal).

Example approach for changing rates:

  1. Identify the quarterly IRS rate periods that fall inside your overdue window.
  2. For the first interval (d1 days) use r1 and compute interest with the compound formula.
  3. Add interest to principal to produce a new balance at the start of the second interval.
  4. Repeat for each subsequent interval.

This stepwise method matches how the IRS applies rates that change quarterly.

Practical tips to reduce interest costs

  • Pay as much as you can as soon as you can. Every dollar paid reduces the principal and therefore future interest.
  • If you can’t pay in full, apply for an IRS installment agreement. Interest still accrues, but a formal plan prevents enforced collection actions in many cases.
  • Consider submitting an offer in compromise only if you truly cannot pay — the IRS will still assess interest while offers are evaluated.
  • Request penalty abatement if you have a valid reason (first-time penalty abatements and reasonable cause exceptions exist). Interest generally remains unless a specific waiver applies; see our page on Tax Penalty Abatement.

In my experience, taxpayers who quickly file and pay what they can and then set up an installment agreement avoid the worst collection outcomes and reduce long-term interest growth.

Mistakes to avoid

  • Don’t assume interest is simple — using the simple formula for long delays significantly understates what you owe.
  • Don’t forget to check for changed rates when your overdue period spans quarters.
  • Don’t mix federal and state rules: many states have their own interest rules and rates for unpaid state taxes.

How to find the current IRS rate

The IRS publishes interest rates on its website each quarter (the page title is typically “Interest Rates for Underpayments and Overpayments of Taxes”). For the exact rate to use in calculations, always check the IRS page for the quarter(s) that cover your overdue period.

Authoritative resource: Internal Revenue Service — “Interest Rates for Underpayments and Overpayments of Taxes” (IRS.gov). The IRS page explains the quarterly rate-setting process and includes tables for current and historical rates.

Quick calculator workflow you can follow

  1. Get your unpaid tax balance and the dates it was unpaid.
  2. Retrieve IRS quarterly rate(s) covering the period.
  3. If rates didn’t change during your overdue window, use the compound formula with the single r. If they changed, compute interval-by-interval.
  4. Use a spreadsheet or calculator to apply the daily compounding formula or ask a tax professional to compute it.

I often build a simple spreadsheet for clients that applies the stepwise compound calculation across rate-change dates — that eliminates manual rounding errors and shows each period’s effect on the balance.

When to call a professional

  • If your unpaid tax runs into the thousands or more and covers multiple rate periods, a tax professional can calculate exact interest and recommend negotiation options.
  • If you have collection notices, liens, or levies, professional help can clarify how interest, penalties, and enforcement interact.

Limitations and legal disclaimers

This article is educational and describes how the IRS calculates interest in general terms. It does not replace personalized tax advice. Interest rates and rules can change; consult the IRS website for current rates and speak with a qualified tax professional for guidance tailored to your situation.

Further reading and resources

If you’d like, use a spreadsheet or calculator to run your specific numbers and consider consulting a tax professional for amounts that would materially affect your finances.