Overview

When you don’t pay your federal tax balance by the due date, the IRS begins charging interest on the unpaid amount. Interest accrues daily and is added to the total owed; that new total then continues to accrue interest, so the balance can grow faster than simple annualized math suggests (IRS guidance: https://www.irs.gov/payments/interest-on-unpaid-taxes).

Background: why the IRS charges interest

The interest charge serves two purposes: to compensate the government for the time value of money and to encourage timely payment. The IRS updates rates each quarter; for most individual underpayments the rate equals the federal short‑term rate plus 3 percentage points (the IRS posts quarterly rates and explanations on its site).

How interest is calculated (simple formula and example)

The IRS calculates interest on a daily basis. The basic computation is:

unpaid balance × (annual interest rate ÷ 365) × number of days unpaid

Example: if your unpaid balance is $1,000 and the annual IRS rate is 7.0%, the interest for 30 days is about:

1000 × (0.07 ÷ 365) × 30 ≈ $5.75

Because interest is applied daily and added to the principal, the effective charge for longer periods is slightly higher than repeating the daily formula once.

Penalties vs. interest

Interest is separate from penalties. Two common penalties taxpayers face are:

  • Failure‑to‑file: generally 5% of the unpaid tax per month (up to 25%).
  • Failure‑to‑pay: generally 0.5% of the unpaid tax per month (up to 25%), though circumstances can change the rates and limits.

Interest accrues on the tax and on any penalties that the IRS assesses (see IRS penalties and interest pages).

Who is affected

Any taxpayer — individuals, businesses, estates — with an unpaid federal tax balance can be charged interest. Interest applies regardless of the size of the balance and continues until the IRS receives full payment or the debt is otherwise resolved.

Real‑world note from practice

In my 15 years advising clients, the most common surprise is the speed at which interest and penalties together increase a modest tax debt. Prompt action (even a partial payment or setting up a plan) usually limits total extra cost.

Practical ways to limit interest and related costs

  • Pay what you can immediately. Every payment reduces the base on which interest accrues.
  • Use electronic payments (EFTPS, Direct Pay, debit/credit) to ensure timely receipt.
  • If you can’t pay in full, apply for an IRS installment agreement online; interest continues to accrue, but the agreement stops enforced collection while you are compliant. For a step‑by‑step walkthrough, see: Setting Up an IRS Installment Agreement Online: A Practical Walkthrough.
  • Negotiate alternatives when eligible. Offers in Compromise or partial‑payment agreements may reduce total liability for qualifying taxpayers — these options have strict rules and documentation requirements.
  • Ask for penalty relief. First‑time penalty abatement is available in some situations; interest is generally not abated, but reducing penalties lowers the amount on which interest compounds.

Options and related resources on FinHelp

Common mistakes and misconceptions

  • Thinking interest is small or purely symbolic. Even modest annual rates compound quickly when payments are delayed.
  • Believing a filed extension delays payment due dates. An extension extends filing time, not the time to pay; interest still accrues on unpaid taxes after the original due date.
  • Assuming installment agreements stop interest. Installment agreements stop enforced collection while current but do not stop interest accrual.

Table: quick calculation examples

Scenario Annual IRS rate (example) Period Approx. interest on $1,000
Short — 30 days 7.0% 30 days $5.75
One year (simple) 7.0% 365 days ~$70.00

Frequently asked questions

Q: How often does the IRS change the interest rate?
A: The IRS updates rates quarterly. You can check current and historical rates on the IRS website (IRS quarterly interest rates page).

Q: Will an installment agreement stop interest from growing?
A: No. An installment agreement prevents many collection actions while you comply, but interest continues to accrue on the unpaid balance (IRS installment agreement guidance).

Q: Can the IRS waive interest?
A: Interest is rarely waived. The IRS may abate penalties in specific cases (first‑time penalty abatement or reasonable cause), but interest typically remains unless a very narrow statutory exception applies.

Professional disclaimer

This article is educational and does not replace personalized tax, legal, or financial advice. For advice tailored to your situation, consult a certified tax professional or the IRS.

Authoritative sources

Last reviewed: 2025. Content reflects IRS rules and published guidance current as of 2025.