USTaxPenaltySaverQ1 2026: Rate Holds Steady at 7%
The IRS announced on November 21, 2025 that interest rates for Q1 2026 (January 1 through March 31) remain unchanged at 7% for individual taxpayers. This marks the fifth consecutive quarter at 7%, extending back to Q1 2025.
The rate applies to both underpayments (tax you owe the IRS) and overpayments (tax the IRS owes you). Corporate rates differ: 7% for underpayments, 6% for overpayments up to $10,000, and 4.5% for the portion of corporate overpayments exceeding $10,000. Large corporate underpayments carry a 9% rate.
For comparison, the rate was 8% throughout 2024, dropped to 7% in Q1 2025, and has remained there since. The current 7% rate is still historically elevated; from 2012 through 2017, the rate was just 3%.
Q2 2026 Forecast: Likely to Remain at 7%
The Q2 2026 rate (April through June) has not yet been officially announced. The IRS typically publishes the rate in a Revenue Ruling about one month before the quarter begins, so expect the announcement in early March 2026.
The rate is determined by the federal short-term rate for October 2025 (the first month of the quarter preceding Q2). Based on published Applicable Federal Rates, the relevant short-term rate is approximately 3.63% (annual compounding), which rounds to 4%. Adding the statutory 3 percentage points gives a projected Q2 rate of 7%.
Barring a significant shift in Federal Reserve policy that would change the underlying federal short-term rate, Q2 2026 is very likely to remain at 7%. We will update this article when the official announcement is made.
How Daily Compounding Works Against You
IRS interest is not simple interest. It compounds daily under IRC Section 6622. This means you pay interest on your interest, and the effective annual rate is slightly higher than the stated 7%. The daily rate is 7% divided by 365 = 0.01918% per day.
On a $10,000 balance, day one accrues $1.92 in interest. Day two accrues interest on $10,001.92, which is also $1.92 (the difference is tiny at first). But over a year, daily compounding on $10,000 at 7% produces approximately $725.08 in interest, compared to $700 with simple annual interest.
The effect is more pronounced over longer periods. Over 3 years without payment, a $10,000 balance grows to approximately $12,338 (23.4% total interest), not the $12,100 that simple interest would produce. This is why paying down your balance as quickly as possible saves you more than the headline rate suggests.
Real Dollar Impact at 7%
Here is what 7% interest costs on common IRS balance amounts over various time periods. These figures include daily compounding and are approximate.
On $5,000 owed: 3 months costs about $88, 6 months costs about $178, 1 year costs about $363, 2 years costs about $753. On $10,000 owed: 3 months costs about $177, 6 months costs about $357, 1 year costs about $725, 2 years costs about $1,505. On $25,000 owed: 3 months costs about $442, 6 months costs about $893, 1 year costs about $1,813, 2 years costs about $3,762.
These interest charges are in addition to any failure-to-file or failure-to-pay penalties. The combined cost of penalties and interest can be substantial. Use our free interest calculator to see the exact impact on your specific balance and timeline.
How to Reduce Your Interest Burden
Pay as much as possible, as soon as possible. Interest stops accruing on the portion you pay. If you owe $10,000 and pay $7,000 today, interest only accrues on the remaining $3,000. Even partial payments save money.
Set up a payment plan. While interest continues during an installment agreement, the failure-to-pay penalty rate drops from 0.5% to 0.25% per month, cutting the penalty portion in half. Apply online at IRS.gov/opa for balances of $50,000 or less.
Consider paying with a personal loan. If you can get a personal loan at less than 7%, paying off your IRS balance and repaying the loan may cost you less overall. Compare the IRS rate (7% compounded daily, plus penalties) against available loan rates.
Request interest abatement if the IRS caused the delay. Under IRC Section 6404(e), the IRS must abate interest attributable to unreasonable errors or delays by IRS employees in performing ministerial or managerial acts. If the IRS took years to process your return or lost your correspondence, you may qualify.
Historical IRS Interest Rates (2020-2026)
The IRS interest rate has fluctuated significantly: Q1-Q3 2020: 5%, Q4 2020 through Q4 2021: 3%, Q1-Q2 2022: 4%, Q3 2022: 5%, Q4 2022: 6%, Q1 2023: 7%, Q2-Q4 2023: 8%, Q1-Q4 2024: 8%, Q1-Q4 2025: 7%, Q1 2026: 7%.
The rate tracks the Federal Reserve's federal funds rate with a lag. As the Fed raised rates aggressively in 2022-2023, the IRS rate climbed from 3% to 8%. The slight decline to 7% in 2025 reflected the Fed's rate cuts beginning in late 2024. If the Fed continues to cut rates, the IRS rate may eventually drop below 7%, but the lag means changes appear 1-2 quarters after Fed action.
Key Takeaways
The IRS interest rate for Q1 2026 is 7%, unchanged from 2025. Q2 2026 is projected to remain at 7% based on the January 2026 federal short-term rate. The rate has been stable for five consecutive quarters.
At 7% compounded daily, a $10,000 IRS balance costs about $725 per year in interest alone, on top of any penalties. The most effective way to reduce interest is to pay your balance down as quickly as possible.
Use our free interest calculator to see the exact impact of the current rate on your balance. If the IRS caused delays in your case, you may qualify for interest abatement under IRC Section 6404(e).