The IRS charges interest on taxes you owe but don't pay by the important date

The IRS interest rate is the percentage the agency adds to your unpaid tax bill each quarter. It is not a penalty — it is the cost of borrowing money from the government. The rate changes every three months and is tied to the federal short-term interest rate plus 3 percentage points. The IRS announces the new rate in early January, April, July, and October, and it takes effect on the 1st of the following month.

Interest accrues daily from the due date of your return until you pay in full. If you file late and owe tax, interest starts from the original due date, not the date you file. Interest compounds daily, meaning you pay interest on the interest you have already accumulated.

Key Takeaways

  • The IRS interest rate is the federal short-term rate plus 3 percentage points, and it changes quarterly on February 1, May 1, August 1, and November 1.
  • Interest accrues daily from the tax important date until you pay, even if you also owe a penalty, and it compounds.
  • You can find the current and past rates on the IRS website under "Interest Rates" in the Tax Professionals section.
  • Interest is tax-deductible if you itemize deductions and the tax debt relates to a business or investment activity, but not for personal income tax debt.
  • Setting up a payment plan with the IRS does not stop interest from accruing, though it may lower your total cost by reducing penalties.

How the IRS calculates the quarterly rate

The IRS uses a formula set by federal law: the federal short-term interest rate for the quarter plus 3 percentage points. The federal short-term rate is published by the Treasury Department and changes based on market conditions. For example, if the federal short-term rate is 5.5 percent, the IRS rate for that quarter would be 8.5 percent.

The rate applies to all taxpayers equally — individuals, businesses, and estates all pay the same rate in a given quarter. The rate does not depend on your credit score, income, or how much you owe. It is purely a statutory rate set by Congress and adjusted quarterly by the Treasury.

When interest starts and how it compounds

Interest begins on the original due date of your return, which is usually April 15 for individual income tax returns. If you file an extension, the due date moves to October 15, but interest still starts on April 15 if you owe tax. This is true even if you did not know you owed money until you filed.

Interest compounds daily, which means each day's interest is added to your balance, and the next day's interest is calculated on the new, higher balance. Over months or years, this compounds significantly. A $10,000 tax debt at 8 percent annual interest costs roughly $20 per day in interest alone, and that amount grows as the balance grows.

Interest versus penalties: what you owe

Interest and penalties are separate charges. Penalties are punitive — they exist to discourage late filing or underpayment. Interest is the cost of the debt itself. You can owe both at the same time. The failure-to-pay penalty is typically 0.5 percent of your unpaid tax per month (up to 25 percent total), and interest accrues on top of that.

If you set up a payment plan or an offer in compromise with the IRS, penalties may be reduced or waived in some cases, but interest continues to accrue. The IRS has limited authority to abate (forgive) interest, and it is only available in narrow circumstances, such as when the IRS made an error or caused an unreasonable delay.

Finding the current IRS interest rate

The IRS publishes the current interest rate on its website at irs.gov. Go to the "Tax Professionals" section and look for "Interest Rates." The page lists the rate for the current quarter and all previous quarters going back several years. You can also call the IRS at 1-800-829-1040 and ask for the current rate.

The rate is effective on the 1st of February, May, August, and November each year. The IRS announces the new rate in the preceding month. If you are setting up a payment plan or calculating what you will owe, use the rate that is in effect on the date you are checking, not the rate from when you originally owed the tax.

Tax treatment of interest you pay

Interest on federal income tax debt is generally not tax-deductible for individuals, even if you itemize deductions. However, if the tax debt relates to a business or rental property, the interest may be deductible as a business expense. You would report it on Schedule C (for self-employment) or Schedule E (for rental income).

If you are a business owner and the IRS assesses interest on a business tax debt, you may be able to deduct that interest. The key is that the underlying tax must relate to business or investment income, not personal income tax. Consult a tax professional if you are unsure whether your situation qualifies.

What happens if you set up a payment plan

If you cannot pay your tax bill in full, you can request an installment agreement (payment plan) from the IRS. A payment plan does not stop interest from accruing — you will still owe interest on the unpaid balance each quarter. However, a payment plan may reduce or eliminate the failure-to-pay penalty, which can lower your total cost.

The IRS charges a setup fee for an installment agreement, typically between $31 and $225 depending on the type of plan and how you set it up. Short-term payment plans (120 days or less) have lower or no fees. Long-term plans accrue interest for the entire duration, so the longer you take to pay, the more interest you will owe overall.

Frequently Asked Questions

What is today's IRS interest rate?

The IRS interest rate changes quarterly. To find the current rate, visit irs.gov and search for "Interest Rates" in the Tax Professionals section, or call 1-800-829-1040. The rate is effective on February 1, May 1, August 1, and November 1 each year.

Can the IRS forgive or reduce interest I owe?

The IRS can abate (forgive) interest only in limited cases, such as when the IRS made an error or caused an unreasonable delay in your case. You can request abatement by calling the IRS or filing Form 843, Claim for Refund and Request for Abatement. Most requests are denied unless you have clear documentation of IRS error.

Does interest stop if I file for bankruptcy?

Filing for bankruptcy triggers an automatic stay, which temporarily halts most collection actions, including interest accrual on some debts. However, tax debt is treated differently in bankruptcy, and interest may continue to accrue depending on the chapter you file under. Consult a bankruptcy attorney for your specific situation.

How much interest will I owe if I don't pay for a year?

Interest depends on the rate in effect each quarter and compounds daily. At an 8 percent annual rate, a $10,000 debt would accrue roughly $800 in interest over a year, plus daily compounding. The exact amount varies because the IRS rate changes quarterly. Use an online calculator or contact the IRS for a specific estimate.

Is interest charged on penalties too?

Yes. Interest accrues on the total amount you owe, including penalties. If you owe a $1,000 penalty plus $5,000 in tax, interest is calculated on the full $6,000 balance. This is one reason why paying as soon as possible reduces your total cost.