How the IRS calculates failure-to-pay interest (step-by-step)

The IRS charges failure-to-pay interest on unpaid federal tax balances from the tax due date until the liability is paid in full. Key rules:

  • The interest rate is set quarterly and equals the federal short-term rate plus 3% for individual and corporate underpayments. See the IRS quarterly interest rates page for current figures: https://www.irs.gov/payments/interest-rates.
  • Interest accrues daily and compounds daily. That means each day’s accrued interest becomes part of the balance that can generate interest the next day.
  • Interest is computed on the unpaid balance, including tax, penalties, and previously accrued interest (because of daily compounding).

Mathematically, for a simple non-compounding approximation you can use:

Daily interest = unpaid balance × (annual interest rate / 365)

Total interest for N days ≈ unpaid balance × (annual rate / 365) × N

This linear formula is adequate for short periods or quick estimates. The IRS, however, compounds daily, so the exact calculation is iterative: each day the balance becomes

Balance{day+1} = Balance{day} × (1 + annual_rate/365)

Apply that daily multiplier for each day the tax is unpaid to get the precise amount.

Example (precise illustration):

  • Tax owed on April 15: $10,000
  • Annual interest rate: 6% (0.06)
  • Daily multiplier: 1 + 0.06/365 = 1.0001643836
  • Days unpaid: 60

Exact compounded balance = $10,000 × (1.0001643836)^{60} = $10,000 × 1.0099 ≈ $10,099.00

Interest accrued ≈ $99.00 after 60 days. The simple linear estimate would be $10,000 × (0.06/365) × 60 = $98.63 — close, but daily compounding slightly increases the total.

Real-world note: the IRS posts the current quarterly rates and historical tables that let you calculate each day’s rate when rates change mid-period: https://www.irs.gov/payments/interest-rates.

How failure-to-pay interest interacts with penalties and agreements

Interest and penalties are separate charges. The common failure-to-pay penalty is 0.5% of the unpaid tax per month (up to 25% of the tax) and applies in addition to interest. The IRS reduces the penalty rate to 0.25% per month while an approved installment agreement is in place and the taxpayer is timely with payments. See IRS guidance on the failure-to-pay penalty: https://www.irs.gov/penalties/failure-to-pay-penalty.

Important points:

  • Interest continues to accrue even if an installment agreement or Offer in Compromise is accepted. Interest is not reduced or forgiven unless specific statutory relief applies.
  • If you have a balance and later receive a refund in a subsequent year, the IRS may offset the refund against the unpaid balance; interest continues until the offset clears.

Practical strategies to minimize failure-to-pay interest (what works in practice)

1) Pay as much as you can as early as you can

In my practice advising taxpayers for over a decade, the single most effective action is making an immediate payment — even a partial payment. Since interest compounds on the unpaid balance, every dollar paid early reduces the principal that accrues daily interest.

2) File your return on time even if you cannot pay

Filing on time avoids the much larger failure-to-file penalty (which can be more punitive than the failure-to-pay penalty). Filing promptly preserves options like installment agreements and prevents collection actions that can increase costs.

3) Use an IRS direct-debit installment agreement for predictable payments

Setting up a direct-debit installment agreement reduces administrative defaults and makes your payments automatic. Interest will still run on the unpaid balance, but predictable payments reduce the total days outstanding and can lower total interest and penalty accrual. See our guide to choosing the right installment agreement for your situation: https://finhelp.io/glossary/installment-agreements-choosing-the-right-type-for-your-situation/ and the how-to for Form 9465: https://finhelp.io/glossary/how-to-use-form-9465-to-request-an-installment-agreement-online/.

4) Prioritize higher-impact accounts and use balances strategically

If you have multiple obligations (taxes, consumer debt, mortgage), prioritize the tax balance that is accruing the highest effective interest-plus-penalty cost or the one at greatest immediate collection risk. In some cases, paying down a tax liability can avoid a lien or levy that would be more costly than credit-card interest.

5) Consider short-term financing when the cost is lower than IRS interest

If you can obtain a low-cost short-term loan (for example, 0% introductory credit or a personal loan with a fixed rate below the IRS rate), using that to pay the IRS and then repaying the loan can save money. Do the math: compare total loan interest and fees versus expected IRS interest and penalties. Our overview of interest-rate tradeoffs may help evaluate that decision: https://finhelp.io/glossary/how-to-compare-refinancing-offers-beyond-the-interest-rate/.

6) Request penalty abatement when appropriate — interest usually remains

You can request first-time penalty abatement (FTA) for the failure-to-pay penalty in certain situations, and the IRS sometimes removes penalties for reasonable cause. However, interest is statutory and normally cannot be abated simply by reasonable cause — interest will usually remain even if penalties are forgiven. See IRS guidance on penalties and relief options: https://www.irs.gov/penalties.

7) Explore Offers in Compromise cautiously

An Offer in Compromise (OIC) can reduce the tax liability, but interest continues to accrue until the offer is accepted and the agreed payments are made. OICs are not quick fixes and require documentation; they are best when you can’t pay and have no realistic ability to pay in the foreseeable future: https://www.irs.gov/individuals/offer-in-compromise.

Common mistakes that increase interest costs

  • Waiting to file: If you don’t file, you forfeit options and invite higher penalties.
  • Ignoring partial payments: Small payments reduce the daily-compounding base.
  • Misunderstanding installment agreements: Some taxpayers assume interest stops under installment plans — it does not. See our article on interest charges while on agreements: https://finhelp.io/glossary/understanding-interest-charges-on-installment-agreements/.
  • Choosing a high-cost financing option without comparing total costs.

Worked examples for planning

Example A — Short delay (30 days)

  • Tax due: $5,000
  • Annual IRS rate: 7% (0.07)
  • Daily rate: 0.07/365 = 0.00019178

Simple estimate: $5,000 × 0.00019178 × 30 ≈ $28.77

Exact compounded: $5,000 × (1 + 0.00019178)^{30} ≈ $5,000 × 1.00577 ≈ $5,028.85 (interest ≈ $28.85)

Example B — Use of a short-term loan

  • Tax due: $20,000
  • IRS annual rate: 8% → expected interest for 90 days ≈ $20,000 × 0.08/365 × 90 = $394.52
  • If you can borrow $20,000 at 6% APR for 90 days, the loan cost ≈ $20,000 × 0.06/365 × 90 = $295.89 — cheaper by roughly $100 and likely worth it after fees.

Always calculate full loan costs (origination fees, prepayment penalties) before using credit to pay taxes.

What to expect after you take action

  • After payment or an installment agreement is established, the IRS will continue to compute daily interest until the account is paid in full.
  • If you set up direct debit, you reduce the risk of default and the 0.5% failure-to-pay penalty may remain reduced while you meet the agreement’s terms.
  • If you qualify and receive penalty abatement, expect penalties to be removed but interest usually remains unless a special relief applies.

Professional disclaimer

This article is for educational purposes and does not constitute legal or tax advice. Tax rules and IRS procedures change; consult a qualified tax professional or the IRS for advice tailored to your situation.

Authoritative sources

For practical help setting up the correct payment path, see our installment agreement guides and the Form 9465 how-to (linked above).