Overview

The IRS charges interest on any unpaid federal tax balance to compensate the government for the time value of money and to encourage timely payment. The statutory rule is straightforward in form but can be costly in practice: the IRS sets the interest rate each quarter at the federal short‑term rate plus 3 percentage points. Interest accrues every day from the original due date of the tax return until the liability is paid in full and is compounded daily.

Authoritative sources: IRS — Interest (https://www.irs.gov/interest) and IRS — Payments (https://www.irs.gov/payments). This article is educational and based on professional experience; consult a tax advisor for tailored guidance.

How the IRS interest rate is determined

  • Quarterly rate: The IRS publishes interest rates each quarter. The annual rate = federal short‑term rate + 3% (per IRS guidance). See the current rates at the IRS Interest page (IRS, Interest).
  • Daily compounding: The annual rate is converted to a daily rate for compounding. The IRS applies interest on a daily basis; use the annual rate divided by 365 (366 in leap years) to estimate the daily rate for calculations.

Example: If the annual IRS rate for underpayments is 6% for a quarter, the daily rate ≈ 6% / 365 ≈ 0.01644% per day.

When interest starts and stops

  • Interest begins on the original due date of the tax (for most individual returns, April 15, unless a different due date applies). An extension to file does not extend the time to pay; interest still runs from the original due date.
  • Interest stops the day the IRS receives full payment (or the payment is otherwise credited). It continues to accrue up to and including the date the liability is satisfied.

Important: Interest continues to accrue during many IRS collection tools (including installment agreements and offer-in-compromise processing) unless the IRS explicitly states otherwise.

How interest is calculated — step by step

  1. Determine the unpaid principal on each day. Interest is charged on the unpaid balance and any previously accrued interest (because of daily compounding).
  2. Use the appropriate annual IRS rate for the period the balance was outstanding.
  3. Convert the annual rate to a daily rate: daily rate = annual rate / 365 (use 366 in leap years).
  4. Apply the daily rate to the daily unpaid balance to compute interest for that day.
  5. Repeat for each day the balance remains unpaid. Interest compounds daily.

Simple approximation for short periods: Interest ≈ unpaid balance × (annual rate) × (days outstanding / 365). For long or multi‑rate periods, compute day‑by‑day or use IRS-provided calculators and your IRS account transcripts for accuracy.

Worked example

You owe $10,000 on the tax due date. The IRS annual interest rate for the period is 5%.

  • Daily rate ≈ 0.05 / 365 = 0.00013699
  • Interest for 30 days ≈ $10,000 × 0.00013699 × 30 ≈ $41.10
    Because interest compounds daily, the exact amount will be slightly higher than this approximation when computed day‑by‑day; however, this method is sufficient for quick estimates.

How interest interacts with penalties and payment plans

  • Interest vs. penalties: Interest is separate from civil penalties (failure-to-file, failure-to-pay). Even if the IRS abates a penalty, interest usually remains unless extraordinary relief is granted. The IRS’s penalty relief procedures do not typically remove interest (IRS, Penalty Relief).
  • Installment agreements: Interest continues to accrue while a taxpayer is on an installment agreement. Some payment plan types (short-term vs. long-term) influence total cost: shorter plans reduce total interest paid. For more on how penalties and interest behave under different repayment setups, see our guide on how penalty and interest are treated under different payment plans (FinHelp) — https://finhelp.io/glossary/how-penalty-and-interest-are-treated-under-different-payment-plans/.
  • Offers in Compromise (OIC): Interest generally accrues until the liability is paid or the OIC is accepted and its terms are satisfied. Offers must consider continuing interest when evaluating whether a compromise is reasonable.

Checking your balance and current rates

  • Your IRS Online Account shows your current balance, payments, and estimated interest. See IRS — Online Account at https://www.irs.gov/payments for access instructions.
  • The IRS posts current interest rates each quarter on the Interest page: https://www.irs.gov/interest. Always use the rates for the specific period when you were unpaid.

Common taxpayer questions (concise answers)

  • Does filing for an extension stop interest? No. An extension to file only extends the time to file, not the time to pay. Interest starts from the original due date.
  • Can the IRS waive interest? The IRS rarely waives interest. Penalty abatement is available in limited cases (e.g., First Time Penalty Abatement or reasonable cause), but interest abatement is uncommon (see IRS guidance on penalty relief).
  • If I start a payment plan will the interest stop? No. Interest generally continues to accrue during installment agreements; faster payoff lowers total interest.

Practical strategies to reduce interest costs

  1. Pay what you can as soon as possible. Every dollar paid reduces the principal and future interest accrual.
  2. Use short-term payment plans where possible. A short-term plan (120 days or less) avoids some fees and minimizes total interest compared with a long-term plan.
  3. Prioritize paying tax balances before other unsecured debt with higher interest — but compare options because some consumer debts may carry higher interest than IRS rates.
  4. Explore penalty abatement first if penalties are material. While penalty relief won’t usually remove interest, reducing penalties lowers the principal and total cost.
  5. Document financial hardship and communications with the IRS carefully. Proper documentation improves chances of penalty relief and smoother collection handling — see our checklist on best practices for documenting payment plans (FinHelp) — https://finhelp.io/glossary/best-practices-for-documenting-payment-plans-and-keeping-them-in-good-standing/.
  6. If a lien has been filed, learn how to request a withdrawal after paying or setting up a payment plan: https://finhelp.io/glossary/how-to-request-a-lien-withdrawal-after-paying-or-setting-up-a-payment-plan/.

Real-world perspective from practice

In my experience as a CPA, small delays often compound into larger problems. For example, a $5,000 unpaid balance left for eight months at a typical underpayment rate can add several hundred dollars in interest. Clients who enter short-term arrangements or make partial payments reduce total cost and collection risk.

One common oversight is assuming an extension to file gives more time to pay — I regularly remind clients that tax payments must be made by the original due date to avoid interest.

When to seek professional help

  • If your balance is large, interest and penalties are growing, or a lien or levy is threatened, consult a tax professional quickly.
  • A CPA, enrolled agent, or tax attorney can negotiate installment agreements, prepare penalty abatement requests, and evaluate offers-in-compromise.

Documentation and recordkeeping tips

  • Keep copies of IRS notices and your payment records. If you arrange a plan by phone, follow up with a written confirmation and keep the IRS confirmation number.
  • Track dates and amounts paid so you can reconcile the IRS balance with your own ledger. Discrepancies happen; timely records speed resolution.

Closing summary

The IRS applies interest to unpaid tax balances at the federal short‑term rate plus 3 percentage points, compounded daily from the tax due date until the balance is paid. Interest typically continues during installment agreements and is rarely waived, so acting quickly — paying as much as you can, choosing shorter payment plans, and documenting everything — is the most effective way to limit cost.

Professional disclaimer: This article provides general information and is not tax advice. For guidance specific to your situation, consult a qualified tax professional.

Sources

Internal resources