USTaxPenaltySaverCurrent IRS Interest Rates (2026)
The IRS adjusts interest rates quarterly. For Q1 2026 (January 1 through March 31), the underpayment rate for individual taxpayers is 7% per year. This is the rate applied to most taxpayers who owe taxes, including balances from CP14 notices, installment agreements, and unpaid assessments.
There are actually four different IRS interest rates depending on who owes and how much. Individual underpayments: 7%. Corporate underpayments: 7%. Large corporate underpayments (over $100,000): 9% (federal short-term rate + 5 points). IRS overpayments (refunds owed to you): 7% for individuals, 6% for corporations.
The Q2 2026 rate (April 1 through June 30) will be announced in March 2026 based on the federal short-term rate from January 2026. Check IRS.gov or our calculator for the latest rates.
Important: These rates apply to the tax balance only. Penalties are calculated separately. Interest accrues on both the unpaid tax AND any assessed penalties, which is why your total balance can grow faster than the stated interest rate suggests.
How IRS Interest Is Calculated (Daily Compounding)
The IRS does not use simple interest. It uses daily compounding as required by IRC 6622. This means interest is calculated each day on the full outstanding balance, including previously accrued interest. The daily rate is the annual rate divided by 365 (or 366 in leap years).
For a 7% annual rate, the daily rate is approximately 0.01918% (7% / 365). On a $10,000 balance, that is $1.92 per day in interest. But because yesterday's interest is added to today's balance, the effective cost increases slightly each day. Over a full year, 7% with daily compounding yields approximately 7.25% in total interest.
This may not sound like a big difference, but on larger balances or longer timeframes, it adds up. On a $50,000 debt over 3 years at 7% daily compounding, you would pay approximately $11,625 in interest, compared to $10,500 with simple annual interest. That is over $1,100 more due to compounding.
What You Actually Pay: Real Examples
On a $1,000 balance at 7% daily compounding: After 6 months, you owe approximately $35.50 in interest. After 1 year, approximately $72.50. After 2 years, approximately $150.25. After 3 years, approximately $233.70.
On a $5,000 balance at 7%: After 6 months, approximately $177.50. After 1 year, approximately $362.50. After 2 years, approximately $751.25. After 3 years, approximately $1,168.50.
On a $10,000 balance at 7%: After 6 months, approximately $355. After 1 year, approximately $725. After 2 years, approximately $1,502. After 3 years, approximately $2,337. And this is interest alone, before any penalties.
These figures demonstrate why paying IRS debt sooner saves significant money. Even if you cannot pay in full, making partial payments reduces the principal balance and therefore reduces the daily interest accrual.
Historical IRS Interest Rates (2020-2026)
IRS underpayment rates by year (individual): 2020 Q1-Q2: 5%, Q3-Q4: 3%. 2021: 3% all year. 2022 Q1: 3%, Q2: 4%, Q3: 5%, Q4: 6%. 2023 Q1: 7%, Q2-Q4: 8%. 2024: 8% all year. 2025 Q1-Q2: 7%, Q3-Q4: 7%. 2026 Q1: 7%.
The trend shows rates rose significantly from the historic lows of 2020-2021 (3%) to recent highs of 8% in 2023-2024, and have since stabilized around 7% in 2025-2026. These rates track the Federal Reserve's benchmark rate movements with a lag of one quarter.
Can You Get Interest Reduced?
Unlike penalties, IRS interest is generally non-negotiable. The IRS is required by law to charge interest on unpaid taxes. However, there are limited exceptions under IRC 6404(e) where interest can be abated.
Interest abatement is available when: The IRS made a ministerial or managerial error that caused an unreasonable delay (for example, losing your paperwork for 6 months). The IRS provided written advice that was erroneous. You are in a federally declared disaster area and qualify for relief under IRC 7508A.
There is also an indirect way to reduce interest: get your penalties abated. Since interest accrues on penalties as well as tax, removing penalties through FTA or Reasonable Cause also removes the interest charged on those penalties. This can result in meaningful savings. Use our interest abatement calculator to check your eligibility.
Interest vs Penalties: What Is the Difference?
Penalties are assessed amounts charged for specific non-compliance (late filing, late payment, inaccurate return). They have maximum caps (25% for failure-to-file, 25% for failure-to-pay) and can be abated through FTA, Reasonable Cause, or statutory exceptions. Penalties stop accruing once the cap is reached.
Interest is the cost of borrowing money from the government. It has no cap and accrues from the original due date of the return until the balance is paid in full. Interest cannot be negotiated in most cases. It compounds daily, making it the component that grows fastest over long periods.
On a typical CP14 balance, penalties make up the larger portion initially (especially if there is a failure-to-file penalty at 5% per month). But over time, interest overtakes penalties because it never stops growing. This is why resolving IRS debt sooner is always better than later.