How does daily interest accrual on tax liabilities work?

Daily interest accrues whenever you have an unpaid federal tax balance. The IRS sets interest rates quarterly based on the federal short-term rate plus a statutory percentage (see the IRS Interest Rates page). Interest is compounded daily, added to the balance, and continues to run until the balance—including penalties—is paid in full. Interest may begin from the original return due date (for unfiled/underpaid returns) or from the date of assessment, depending on the situation.

This article explains how the IRS calculates daily interest, walks through clear examples (including daily compounding), and offers practical steps taxpayers can take to reduce the interest burden.

How the IRS sets and applies interest

  • Rate basis: The IRS’s underpayment and overpayment interest rates are published quarterly and are tied to the federal short-term rate plus a statutory add-on. See IRS.gov — Interest Rates for the current published rates.
  • Daily accrual: The IRS divides the annual interest rate by 365 to determine the daily rate, then compounds interest daily. That means each day’s accrued interest becomes part of the principal for the next day’s calculation.
  • Start date: For most individual underpayments, interest starts on the tax return due date (normally April 15) and continues until the tax is paid. If the IRS assesses the tax later, interest may run from the assessment date (see IRS guidance on assessment and collection).
  • Applies to penalties: Interest is charged on the outstanding balance including penalties, so a late-payment penalty increases both the immediate balance and the base on which interest compounds.

Authoritative source: IRS — Interest Rates (quarterly) and general guidance on interest and penalties (irs.gov/newsroom/interest-rates).

The math: formulas and step-by-step calculations

There are two common ways to compute daily interest on tax liabilities:

1) Simple daily approximation (accurate for short periods):

daily interest = principal × (annual_rate ÷ 365)

Example (approximation):

  • Principal: $10,000 unpaid tax
  • Annual rate: 6% (0.06)
  • Daily rate: 0.06 ÷ 365 = 0.00016438
  • Interest on day 1 ≈ $10,000 × 0.00016438 = $1.64
  • Interest over 30 days (simple sum) ≈ $1.64 × 30 = $49.20

2) Exact daily compounding (IRS method):

amountafterndays = principal × (1 + annualrate ÷ 365)^n
interestforndays = amountafterndays − principal

Using the same example with 6% annual rate and 30 days:

  • amountafter30 = 10,000 × (1 + 0.06 ÷ 365)^30
  • amountafter30 ≈ 10,000 × (1.00016438)^30 ≈ 10,049.95
  • interest ≈ $49.95 (slightly higher than simple sum because of daily compounding)

Notes:

  • The difference between simple approximation and compounding grows with longer periods and higher rates.
  • For multi-year periods, run the compounding formula over the full number of days or compute year-by-year using the quarterly IRS rate if the official rate changes.

Practical tip: In Excel or Google Sheets, use =principal*((1+annual_rate/365)^days-1) for total interest for “days” days.

Worked examples (hypothetical rates for illustration)

Example A — Short delay

  • Unpaid balance: $5,000
  • Annual interest rate (hypothetical): 6% (0.06)
  • Days unpaid: 30

Using compounding:

  • Amount after 30 days = 5,000 × (1 + 0.06 ÷ 365)^30 ≈ 5,024.98
  • Interest ≈ $24.98

Example B — Longer delay with penalty

  • Unpaid balance: $12,000
  • Late-payment penalty added up front: 5% of tax ($600) → new balance = $12,600
  • Annual interest rate (hypothetical): 7% (0.07)
  • Days unpaid: 180

Using compounding:

  • Amount after 180 days = 12,600 × (1 + 0.07 ÷ 365)^180 ≈ 12,961.30
  • Interest ≈ $361.30

Takeaway: Because interest compounds daily, a penalty that increases principal (like a late-payment penalty) also increases interest costs.

Common situations: when interest starts and how it accumulates

  • Unfiled return or underpayment: Interest typically starts from the original due date of the return—even if you file later—unless the IRS assesses a different start date.
  • After audit or assessment: If the IRS assesses additional tax after an audit, interest generally runs from the date of assessment until paid.
  • Installment agreements: Entering an installment agreement does not stop interest from accruing. Interest continues on the unpaid balance while you make payments. See our guide on how installment agreements work for setup tips and how interest affects monthly payments: How Installment Agreements Work: Types and Setup Tips.
  • Offer in Compromise: The IRS continues to charge interest until a liability is paid in full. An Offer in Compromise can reduce principal in eligible cases, which reduces future interest, but interest generally accrues until the offer is accepted and paid. For more on whether an Offer in Compromise might fit your case, see Choosing Between an Installment Agreement and Offer in Compromise.

Internal resources:

Who is affected

Anyone with unpaid federal tax can be charged daily interest: individuals, self-employed taxpayers, partnerships, and corporations. The exact statutory add-on can vary (the IRS publishes specific rates by taxpayer type and by quarter), so businesses and large corporate taxpayers should monitor the IRS quarterly rate announcements.

Practical strategies to limit interest costs

  • Pay as soon as possible: Even partial payments lower the principal and reduce future interest. The first payment yields the biggest marginal reduction in future interest.
  • File on time even if you can’t pay: Filing avoids the failure-to-file penalty (which is generally larger than the failure-to-pay penalty) and limits interest to unpaid tax only. If you owe, file the return and pay what you can.
  • Consider short-term financing carefully: If you can borrow at a lower interest rate than the IRS rate, paying the IRS may save money. Weigh loan fees, penalties for the loan, and risk.
  • Use an installment agreement when necessary: An installment agreement keeps you in good standing with collection, but interest still accrues. For practical guidance, see our Installment Agreement guide.
  • Explore Offer in Compromise if justified: For taxpayers who truly can’t pay, an Offer in Compromise may reduce principal and therefore future interest; it’s not a quick fix and acceptance requires strong documentation.
  • Request penalty abatement when eligible: Penalty relief (abating penalties) lowers the balance, which directly reduces the base used for interest compounding.

Common mistakes and misconceptions

  • Thinking interest accrues monthly: The IRS compounds daily. A monthly expectation usually underestimates total interest.
  • Ignoring penalties: Penalties add to principal and increase interest costs—address both penalties and tax owed.
  • Assuming installment agreements stop interest: They do not; interest continues until balance is cleared.

Frequently asked questions

Q: Can the IRS waive interest?
A: Interest is generally statutory and not subject to waiver. The IRS can abate penalties in some circumstances (reasonable cause), which reduces interest going forward because the abated penalty reduces principal. For specific situations discuss with a tax pro.

Q: How do changing quarterly rates affect calculations?
A: If the IRS changes the published rate during your unpaid period, calculate interest day-by-day or split the period into segments using each applicable quarterly rate. The IRS updates rates quarterly on their website.

Q: How can I estimate interest quickly?
A: Use the approximation principal × (annual_rate/365) × days for short periods or use the compounding formula in a spreadsheet for accuracy over longer intervals.

Action checklist

  • File your return on time even if you can’t pay in full.
  • Pay as much as you can to reduce principal.
  • Consider a direct-debit installment agreement to make payments predictable.
  • If you believe you can’t pay, get professional help to evaluate an Offer in Compromise or other relief options.

Professional disclaimer

This article is educational and not personalized tax advice. Interest rules and quarterly rates change; verify current rates at IRS.gov or consult a tax professional or CPA about your specific situation.

Authoritative sources