How IRS Interest Works on Unpaid Tax

IRS interest on unpaid tax is set by law at the federal short-term rate plus 3 percentage points, compounded daily, with the rate reset every calendar quarter. For the quarter ending September 30, 2026, the individual underpayment rate was 7% per year (last checked 2026-09-30) — always confirm the current quarter’s figure on irs.gov.

Tax Debt Compass is an independent educational guide. We are not the IRS, not a tax firm, and we do not negotiate with the IRS or prepare returns — we explain how the system works in plain English.

Key takeaways

The formula is fixed by law: federal short-term rate + 3%, compounded daily, reset quarterly — not a number the IRS picks at random.
Current rate: 7% per year for individual underpayments (quarter ending September 30, 2026; last checked 2026-09-30). The IRS had already announced 7% for the quarter beginning October 1, 2026.
Interest runs on everything — the unpaid tax, the penalties, and previously accrued interest. The balance never sits still.
The rate follows the calendar, not your account. A balance unpaid across several quarters accrues at each quarter’s rate in turn.
Don’t use a rate table from an old article. Look up the current quarterly rate on irs.gov; this article explains how, below.

The formula: short-term rate plus 3%

Under Internal Revenue Code sections 6621 and 6622, the interest rate the IRS charges on underpayments (and pays on overpayments) for individuals is the federal short-term rate plus three percentage points. The federal short-term rate is a market-based rate the Treasury determines monthly; the IRS then publishes the underpayment rate for each calendar quarter.

A few consequences of this design:

The IRS doesn’t set the rate to punish you. It moves with the broader interest-rate environment — when short-term rates rise, IRS interest rises; when they fall, it falls. Recent quarters have ranged between 6% and 8%, which is why the rate deserves a fresh lookup rather than a memorized number.
The rate that matters is the one in effect while the balance was unpaid. If your debt spans three quarters at three different rates, each quarter’s interest is computed at that quarter’s rate. The rate on the day you pay is not the rate for the whole period.
Corporations have slightly different rules (a higher rate on large corporate underpayments), but for individual taxpayers the formula above is the one that applies.

What daily compounding actually means

“Compounded daily” means the IRS adds interest to your balance every single day, and the next day’s interest is calculated on the new, slightly larger balance. Over a full year, daily compounding makes the effective cost a little higher than the nominal rate suggests — at a 7% nominal rate, the effective annual cost is roughly 7.25%.

To put that in plain terms: interest doesn’t wait for a monthly statement. Every day your balance is unpaid, a tiny slice of interest lands on it, and tomorrow’s slice is computed on today’s slightly bigger number. On its own, one day’s interest is small. Over months and years, the compounding is what turns a manageable balance into a discouraging one — especially because interest also accrues on the penalties sitting on the account.

What interest attaches to

Interest accrues from the payment due date of the tax — generally the original filing deadline — until the balance is paid in full. Filing an extension moves the paperwork deadline, not the payment deadline; interest runs from the original due date regardless.

Importantly, interest applies to more than just the tax itself:

Unpaid tax — the core balance.
Penalties — the failure-to-file and failure-to-pay penalties also accrue interest once assessed. This is the detail that surprises people: the 5% and 0.5% penalties aren’t the end of the math.
Previously accrued interest — that’s what compounding means. Interest on interest.

The practical takeaway: when you look at a balance on a notice, you’re looking at a moving target. Paying down part of it sooner rather than later reduces the base that all future interest is computed on. Partial payments help — there’s no rule that says you must pay in full or not at all.

How to find the current quarterly rate

Because the rate resets every January 1, April 1, July 1, and October 1, any specific number in any article — including this one — has an expiration date. Here’s how to get the live figure:

Go to irs.gov and search for “quarterly interest rates.”
Open the IRS news release for the current quarter (the IRS announces each quarter’s rates in a Revenue Ruling, usually a few weeks before the quarter begins).
Look for the underpayment rate for individuals — that’s the one that applies to personal tax debt. (Overpayment rates and corporate rates are listed separately and don’t apply to what you owe.)

Last checked 2026-09-30: the individual underpayment rate for the quarter ending September 30, 2026 was 7% per year, compounded daily, and the IRS had announced 7% for the quarter beginning October 1, 2026. If you’re reading this later, treat those numbers as history and look up the current quarter.

Why the balance never sits still

Put the pieces together and the growth mechanics of tax debt become clear. On a single unpaid balance, three things are happening at once:

Failure-to-pay penalty accruing at 0.5% per month (0.25% during an installment agreement) until it hits its 25% cap.
Interest compounding daily on the tax, the penalties, and itself, at a rate that resets quarterly.
If the return was never filed, the failure-to-file penalty at 5% per month until its 25% cap — which is why filing the return is always step one.

None of these pause because you’re thinking about it, shopping for help, or waiting for a better month. That’s not meant to frighten you — it’s the honest reason that acting sooner is cheaper than acting later, and why even a partial payment or a filed return changes the trajectory. If the penalties themselves seem unfair or disproportionate, penalty abatement is the mechanism for asking the IRS to reconsider them.

Interest and payment plans

Entering an installment agreement doesn’t stop interest — it keeps compounding daily on the remaining balance until it’s paid off. What the agreement does change is the failure-to-pay penalty rate (dropping from 0.5% to 0.25% per month) and, generally, active collection activity. So interest is the cost that remains no matter which path you take, and it’s the reason that paying the balance down faster — larger monthly payments, lump sums when you can — saves real money over the life of the debt.

This is also why the “minimum payment” mindset can be expensive with tax debt: a payment that barely covers the monthly interest and penalty accrual leaves the principal untouched, and the debt can linger for years. Our guide to IRS payment plans walks through how installment agreements work and what to consider when setting the monthly amount.

Frequently asked questions

What is the current IRS interest rate on unpaid taxes?
The rate is the federal short-term rate plus 3%, compounded daily, reset quarterly. For the quarter ending September 30, 2026, the individual underpayment rate was 7% per year (last checked 2026-09-30), and the IRS announced 7% for the quarter beginning October 1, 2026. Always verify the current quarter’s rate on irs.gov, since it changes four times a year.

Does IRS interest compound daily or monthly?
Daily. Interest is added to the balance each day, and the next day’s interest is figured on the new balance. Over a full year, daily compounding makes the effective annual rate slightly higher than the stated annual rate.

Does the IRS charge interest on penalties too?
In general terms, yes. Once penalties are assessed, interest accrues on the total balance — unpaid tax, penalties, and previously accrued interest. This is one reason penalties matter beyond their face amount: they become part of the base that future interest compounds on.

Can interest be removed or reduced?
Interest is statutory — the IRS generally cannot waive it the way it can abate penalties. Interest is typically reduced only when the underlying tax or penalty it’s attached to is reduced (for example, if a penalty is abated, the interest that accrued on that penalty goes away with it). There is no “first-time abatement” equivalent for interest.

If I set up a payment plan, does interest stop?
No. Interest continues to compound daily on the unpaid balance for the life of an installment agreement. The agreement reduces the failure-to-pay penalty rate (from 0.5% to 0.25% per month) and generally pauses active collection, but interest keeps running until the balance hits zero.

Your concrete next step

Open the IRS’s quarterly interest rates page on irs.gov (search “quarterly interest rates” on the site) and find the individual underpayment rate for the current quarter. Write it down with today’s date. That one number — checked fresh, not remembered from an old article — is the rate your balance is actually accruing at right now, and it’s the number that makes every other decision about your debt concrete.

Tax Debt Compass publishes general educational information about IRS tax debt. Nothing here is tax, legal, or financial advice for your situation. We are not the IRS, not a tax firm, and we do not negotiate with the IRS or prepare returns. Consult a licensed CPA, tax attorney, or enrolled agent about your specific situation.