Interest is the part of an IRS balance that surprises people most. Unlike a penalty, it is not a punishment. It is a charge for the time value of money that the government should have received on the due date. This page explains how IRS interest on unpaid taxes is set, what it applies to, and the limited situations where it can be reduced.
How the rate is set
The IRS publishes new rates each quarter, and the rate for individuals and most businesses who underpay is the federal short-term rate plus 3 percentage points. The rate can go up or down from one quarter to the next, and the rate that applies on a given day is the rate for that day's quarter. We do not list the current number here because it will be out of date within months. The IRS posts the current and prior rates on its quarterly interest rates page.
The IRS also pays interest when it owes you money, which is covered near the end of this page. That is a separate rate category in the IRS tables.
What interest applies to
Interest is charged on unpaid tax and also on most penalties. It starts on different days depending on the penalty:
| Item | When interest generally starts |
|---|---|
| Unpaid tax | The return's original due date (extensions do not change it) |
| Failure-to-file penalty | The return due date, including extensions |
| Accuracy-related penalty | The return due date, including extensions |
| Failure-to-pay, estimated tax and dishonored check penalties | The date the IRS sends a notice or assesses the penalty |
This is why a failure-to-file penalty can carry interest back to the filing deadline, while a failure-to-pay penalty carries interest from about the time the IRS bills you. See the pages on the failure-to-file and failure-to-pay penalties for the rates on those.
Daily compounding in plain numbers
Example (hypothetical). The rate below is made up to show how compounding works. It is not the current IRS rate.
If you owed $10,000 and the rate stayed at 8% a year for a full year with daily compounding, the interest would be roughly $830, slightly more than the $800 you would get from simple interest. The extra amount is interest on interest. The longer a balance sits, the faster the difference grows. In real life the rate changes each quarter, so the actual figure would differ.
How payments are applied
When you send a payment toward a balance, the IRS applies it first to tax, then to penalties, then to interest. Because several penalties are computed on unpaid tax, paying the tax first can slow their growth. If you pay the amount shown on a notice in full by the pay-by date, the IRS does not charge additional interest on that amount.
When interest can be reduced
- Interest on a penalty that is removed. If the IRS removes or reduces a penalty for reasonable cause, first-time abatement or an error, it also reduces the interest that was charged on that penalty.
- Filing an amended return that lowers the tax. The related interest is recomputed.
- IRS error or delay. Interest may be abated only if it was caused by an unreasonable error or delay by an IRS officer or employee in handling your case. This is a high bar. You can ask using Form 843 or a signed letter that identifies the interest and the delay.
- Not a reason by itself: hardship, reasonable cause for late payment, or first-time abatement. Those relieve penalties, not interest on the tax.
If the IRS denies an interest abatement request, the denial letter explains your next options and any deadlines. Read it carefully and keep the dates.
Payment plans and interest
An installment agreement does not stop interest. It keeps accruing on the unpaid balance, including unpaid penalties and interest, until everything is paid. A plan can lower the failure-to-pay penalty rate for eligible individuals, but interest continues at the quarterly rate. If you can afford to pay more than the minimum, a larger payment reduces the total interest.
Interest when you are owed money
The IRS pays interest on overpayments from the latest of the return due date, the date a late return was received, or the date of payment. It stops on the refund or offset date. The IRS has about 45 days after a return is processed to issue a refund without paying interest. See late filing when you are owed a refund for the refund deadline.
How we can help
We can compute how much of a balance is tax, penalty and interest, compare that with your notice, and see whether any piece can be reduced. Where interest is tied to a penalty that qualifies for relief, we prepare the request so the interest is addressed at the same time. We cannot negotiate the interest rate itself, which is set by law.
For more on what to do with a bill, see how to read an IRS notice and our IRS representation service, or contact us.
Frequently asked questions
Can I ask the IRS to waive interest because I could not pay?
Generally no. Hardship does not remove interest on tax. Interest is removed when a related penalty is removed, or in the narrow case of IRS error or delay.
Does interest keep running while I dispute a notice?
Yes, unless the amount is paid. Interest accrues until the balance is paid in full, which is why some taxpayers pay the undisputed amount while they appeal.
Is the IRS interest rate the same for everyone?
The IRS publishes separate categories, such as underpayments and overpayments, and the rate can differ between them. Check the IRS quarterly rates page for the category that matches your situation.
Does an extension stop interest?
No. An extension gives more time to file, not more time to pay. Interest on unpaid tax runs from the original due date.
Official sources
- IRS: Interest
- IRS: Quarterly interest rates
- IRS: Topic no. 653, IRS notices and bills, penalties and interest charges
- IRS: About Form 843
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.