How IRS Interest Works: 2025 and 2026 Rates and How It Adds Up

Interest is often the part of an IRS bill that surprises people most. It starts on the day the tax was due, not the day you got the bill. It is charged on penalties too. And unlike many penalties, it almost never gets waived. Understanding how it works helps you decide how fast to pay and which relief requests are worth making.

How the IRS sets the interest rate

The interest rate is set by law (Internal Revenue Code section 6621), not by the IRS's choice. For individuals and other non-corporate taxpayers:

• Underpayment rate (what you pay): the federal short-term rate plus 3 percentage points.
• Overpayment rate (what the IRS pays you on late refunds): also the federal short-term rate plus 3 percentage points.

The IRS resets the rate every calendar quarter based on the federal short-term rate. For example, the October to December 2026 rate was figured from the federal short-term rate set in July 2026 (IR-2026-98).

Interest compounds daily. Each day's interest is charged on the previous day's balance plus interest. So interest grows on itself.

Corporations follow different rules, including a higher rate for large corporate underpayments.

IRS interest rates for 2025 and 2026

Rates for individual underpayments and overpayments, from the IRS quarterly interest rates page:

The IRS announced on August 21, 2026, that the rate would stay at 7% for the quarter starting October 1, 2026. For reference, the underpayment rate was 8% for all of 2024. Large corporate underpayments are charged 9% in most 2026 quarters (8% in April to June 2026).

When interest starts and stops

Tax. Interest generally starts on the original due date of the return. An extension to file does not extend the time to pay. If you file by October on an extension but pay then, you owe interest from April.

Penalties. Interest on penalties starts at different times:

• Failure-to-file and accuracy-related penalties: from the return due date (including extensions).
• Failure-to-pay, estimated tax and dishonored check penalties: from the date of the notice or the date the penalty is assessed.

Interest itself. Interest is due as it builds up, so unpaid interest also earns interest.

When it stops. Interest stops when you pay the balance in full. If you get a notice and pay the full amount shown by the "pay by" date, the IRS does not charge more interest on that amount.

Does a payment plan stop interest?

No. The IRS says interest keeps building daily on any amount not paid, including on penalties and interest, even on a payment plan. A plan does lower the failure-to-pay penalty to 0.25% a month if you filed on time, but the interest rate stays the same. The faster you pay, the less interest you owe. See IRS payment plans.

The same is true in Currently Not Collectible status and while an offer in compromise is under review: interest keeps running.

Can IRS interest be removed?

Only in specific situations.

1. When the tax or penalty goes down. If you reduce the tax by filing an amended return, or a penalty is removed through penalty relief, the IRS automatically reduces the interest tied to it.

2. Not for reasonable cause or first-time relief. The IRS says plainly that it does not remove or reduce interest for reasonable cause or as first-time relief. Even the new Automatic Exemption from Penalty, which keeps some penalties from being charged on tax year 2025 and later returns, leaves you owing interest on the unpaid tax.

3. Unreasonable IRS error or delay. Under Internal Revenue Code section 6404(e), the IRS may reduce interest caused by an unreasonable error or delay by an IRS employee. To qualify, all of these must be true:

• You file your claim within 3 years from when the return was originally filed, or 2 years from when you paid the tax, whichever is later.
• The interest is on income, estate, gift or certain excise taxes. Employment taxes do not qualify.
• The error or delay happened after the IRS contacted you in writing about an exam, underpayment or payment.
• You and your representative did not contribute to the error or delay.
• The error or delay was in a "ministerial" act (a routine, procedural step with no judgment involved) or a "managerial" act (such as losing a case file or decisions about staff).

General IRS decisions, such as how it organizes processing or delays in new computer systems, do not count. Only the interest from the period of the error or delay can be removed.

How to ask. Submit Form 843, Claim for Refund and Request for Abatement, or a signed letter. Describe when and how the IRS caused the delay or error, and attach supporting documents. If the IRS says no, you can appeal.

Interest the IRS pays you

The IRS pays interest on overpayments, at the same 7% rate for individuals in late 2026. Interest generally runs from the later of the return due date, the date a late return was received, the date the return was in processable form, or the date of payment. The IRS has about 45 days to issue a refund without paying interest on it. If you think the IRS underpaid interest on a refund, you can file Form 843 within six years of the scheduled overpayment.

Ways to keep interest down

• File and pay on time whenever you can, even if you can only pay part.
• Pay as much as possible now. Every dollar paid stops interest on that dollar. See what to do if you can't pay.
• Ask for penalty relief. Removing a penalty also removes the interest on it.
• Choose a shorter payment plan if your budget allows.
• Check your account. Your IRS Online Account and transcripts show your balance, including accrued interest, so you can confirm the numbers on any notice.

IRSV.com is an independent guide and is not affiliated with the IRS. This page is general information, not tax or legal advice. Rules change; confirm details on IRS.gov or with a tax professional. Found an error? Tell us.