IRS Interest on Late Taxes: 2026 Rates, Daily Compounding, and How to Stop It
The irs interest on late taxes is a variable cost added to your unpaid tax balance from the day your return was originally due. For the first quarter of 2026 (January 1 through March 31), the interest rate for individual taxpayers is 7% per year. Unlike penalties, which are often fixed percentages, this interest compounds daily, meaning the IRS recalculates your balance every 24 hours and adds new interest to the previous day’s total.
In this guide, we will explain the specific math the IRS uses to grow your debt, how the 2026 interest rates are determined, and why interest is much harder to “forgive” than penalties. Understanding how irs interest on late taxes works is the best way to realize why even small payments can save you hundreds of dollars over the long term.
How the IRS Interest Rate is Set for 2026
The IRS doesn’t keep interest rates the same forever. They review and adjust the irs interest on late taxes every three months. The rate is tied to the economy; specifically, it is the “federal short-term rate” plus an additional 3% for individuals.
For the 2026 tax year, the rates have shown stability. The IRS announced in Revenue Ruling 2025-22 that the rate will hold steady at 7% for the start of the year. If the federal short-term rate goes up or down later in 2026, your interest rate will follow suit on the first day of the next quarter.
Quick Tip: The irs interest on late taxes also applies to the penalties you owe. This means if you have a $500 penalty you haven’t paid, the IRS charges 7% interest on that $500 just as if it were unpaid tax.
Takeaway: Interest rates are adjusted quarterly, so the amount you pay in January might be different from what you pay in July.
The “Snowball Effect” of Daily Compounding
The most important thing to know about irs interest on late taxes is that it uses “daily compounding”. Most loans, like car notes or mortgages, use monthly interest. However, the IRS recalculates your debt every single day.
Here is how the daily snowball works in 2026:
- Day 1: The IRS takes your balance and applies 1/365th of the 7% annual rate.
- Day 2: The IRS takes the new balance (Original + Day 1 interest) and applies the rate again.
- Ongoing: Because you are paying interest on your interest, the debt grows faster than a simple 7% calculation would suggest.
2026 IRS Interest Rate Comparison
| Taxpayer Type | 2026 Q1 Rate | Compounding |
|---|---|---|
| Individual (Underpayment) | 7% per year | Daily |
| Corporation (Underpayment) | 7% per year | Daily |
| Large Corporate Underpayment | 9% per year | Daily |
Example: If you owe $10,000, you aren’t just charged $700 for the year. Because of daily compounding, you would actually owe approximately $725 in interest by the end of 12 months.
Takeaway: Daily compounding means your tax bill grows every 24 hours, making early payments extremely valuable.
Can Interest Be Waived or Removed?
One common mistake taxpayers make is assuming that “Penalty Abatement” also removes interest. Unfortunately, the irs interest on late taxes is almost never waived. By law, the IRS is required to charge interest as long as there is an unpaid balance.
There are only a few rare exceptions where interest can be reduced:
- IRS Error: If an IRS employee made a documented error or caused an unreasonable delay in processing your case.
- Penalty Removal: If you successfully get a penalty removed (abated), the interest that was charged on that penalty is also removed.
- Disaster Zones: If you live in a federally declared disaster area, the IRS may suspend interest for a specific window of time.
You can learn more about managing these costs on our Late Tax Payment Penalty guide or estimate your own totals with our IRS Penalty Calculator. For help with your specific situation, visit our Contact page or read more About Us here.
Takeaway: While you can fight penalties, the best way to fight interest is simply to pay the principal as fast as possible.
How to Stop IRS Interest From Growing
The only 100% effective way to stop irs interest on late taxes is to pay your balance in full. However, if you can’t pay the whole bill at once, you can still slow the growth:
- Pay What You Can: Since interest is based on the remaining balance, every $100 you pay today prevents future interest from being charged on that $100.
- Prioritize Tax Principal: IRS rules generally apply your payments to the tax principal first, then penalties, and then interest. This is good because it stops interest from growing on the portion you just paid.
- Check for Refund Offsets: If the IRS owes you a refund in a future year, they will automatically apply it to your old debt to stop the interest.
For more information on the rules regarding filing delays, see our page on the IRS late filing penalty or our guide on the Penalty for not filing taxes. We are committed to providing information for all; please see our Accessibility Statement for details.
Takeaway: Even small, frequent payments are better than waiting to pay a lump sum, as they reduce the daily compounding amount.
Frequently Asked Questions
Does the IRS pay me interest if my refund is late?
Yes! If the IRS takes longer than 45 days to send your refund after the deadline, they generally have to pay you interest at the same 7% rate. Note that this interest is considered taxable income and must be reported on your next return.
Is irs interest on late taxes tax-deductible?
No. For individual taxpayers, interest paid to the IRS on personal income tax underpayments is considered “personal interest” and is not deductible on your tax return.
Why is my interest higher than the 7% rate?
It likely isn’t, but it can feel that way because of the daily compounding and the fact that you are also being charged a late payment penalty of 0.5% per month at the same time. Together, these can feel like a much higher interest rate.
What happens if the interest rate changes on April 1st?
The IRS will apply the 7% rate to your balance through March 31. On April 1, they will start applying the new rate (whatever it may be) to the balance you have on that day.
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