The IRS charges interest monthly, compounded daily, at a rate that changes every quarter

The IRS does not charge a flat monthly interest rate. Instead, it sets a quarterly interest rate based on the federal short-term rate plus 3 percentage points. That combined rate applies to your unpaid tax balance, and the interest compounds daily — meaning you owe interest on the interest that has already accrued.

The rate changes on January 1, April 1, July 1, and October 1 each year. For the current quarter, you can find the exact rate on the IRS website under "Interest Rates" or by calling the IRS at 800-829-1040. As of late 2024, the rate has ranged between 8% and 9% annually, but this varies based on market conditions.

Interest begins accruing the day after your tax return is due or the day after you pay, whichever is later. It continues to accrue until you pay the full balance in full, even if you are on a payment plan with the IRS.

Key Takeaways

  • The IRS interest rate is set quarterly and compounds daily, so the longer you wait to pay, the faster your debt grows.
  • Interest rates change on January 1, April 1, July 1, and October 1, and you can find the current rate on the IRS website or by phone.
  • Interest accrues from the day after your return was due or the day after you made a payment, whichever is later.
  • You will owe interest even if you set up a payment plan, installment agreement, or currently cannot pay.
  • The IRS also charges separate penalties — typically 0.5% per month for failure to pay — which stack on top of interest.

How daily compounding works in practice

Compounding daily means the IRS calculates interest on your balance every single day, and that daily interest gets added to your balance. The next day, interest is calculated on the new, larger balance. Over months and years, this compounds significantly.

For example, if you owe $10,000 at an 8% annual rate, the IRS calculates roughly 0.022% interest per day. On day one, you owe about $2.19 in interest. On day two, interest is calculated on $10,002.19, so you owe slightly more. By the end of a year without payment, your balance has grown to roughly $10,829 — not just $10,800.

The IRS publishes daily interest rates for each quarter so you can calculate your exact accrual if needed, though most people find it easier to contact the IRS directly for a payoff amount, which accounts for interest through the payment date.

Interest versus penalties — they are separate charges

Interest and penalties are two different charges that both appear on your IRS bill. Interest is the cost of borrowing money from the government. Penalties are separate charges for specific violations — usually failing to pay on time or failing to file on time.

The most common penalty is the failure-to-pay penalty, which is 0.5% of your unpaid tax per month (or part of a month), up to 25% total. This penalty accrues in addition to interest. So if you owe $10,000, you might owe roughly $50 per month in penalties plus the daily compounding interest.

If you filed your return late, you may also owe a failure-to-file penalty, which is steeper: 5% per month up to 25%. Both penalties stop accruing once you pay the full balance, but interest continues until payment clears.

What happens to interest if you set up a payment plan

Setting up an installment agreement with the IRS does not stop interest from accruing. You will continue to owe interest on your unpaid balance every day, even while you are making monthly payments. The interest is added to your balance, so each payment covers some of the principal and some of the accrued interest.

The IRS also charges a setup fee for an installment agreement — typically $31 to $225 depending on the type of plan and whether you set it up online or by phone. This fee is separate from interest and penalties.

If you fall behind on your installment agreement payments, the IRS can terminate the agreement and pursue collection action. Interest and penalties continue to accrue during any collection process.

How to find your current interest rate and payoff amount

The IRS publishes its current quarterly interest rate on its website at irs.gov under "Interest Rates — Current Rates." You can also call 800-829-1040 and speak to a representative who can tell you the rate and calculate your exact payoff amount as of a specific date.

Your IRS notice or bill will also show the interest rate that applies to your account. If you receive a notice, the rate is printed on the document itself.

For the most accurate payoff amount, always contact the IRS directly or use the IRS payment portal, because the amount changes daily as interest accrues. A payoff quote is usually valid for 120 days from the date issued.

Interest rates for prior years and quarters

If you owe taxes from multiple years, each year's balance may have accrued at different interest rates, depending on when the IRS assessed the tax and which quarters have passed. The IRS applies the current quarter's rate to all unpaid balances, regardless of when the tax was originally due.

The IRS maintains a historical record of interest rates on its website if you need to verify what rate applied during a specific quarter. This information is useful if you are disputing a bill or trying to understand how your balance grew over time.

Frequently Asked Questions

Can the IRS waive interest or penalties?

The IRS can waive penalties in limited circumstances — usually if you had reasonable cause for not paying on time, such as a serious illness or death in the family. Interest is rarely waived. You can request penalty relief by filing Form 843, Request for Refund of an Overpayment, or by calling the IRS and explaining your situation.

Does interest stop accruing once I file an appeal or dispute?

No. Interest continues to accrue while your case is under review or appeal. If you ultimately win your dispute and the IRS reduces your tax bill, the IRS will refund the excess interest you paid, but interest does not stop running during the dispute process.

What is the difference between the interest rate the IRS charges and the rate they pay on refunds?

The IRS charges interest at the federal short-term rate plus 3 percentage points. When the IRS owes you a refund and delays paying it, they pay interest at the federal short-term rate plus 2 percentage points — one point lower. Both rates change quarterly.

If I pay part of my bill, does interest recalculate?

No. Interest continues to accrue on your remaining unpaid balance at the same rate. Your payment reduces the principal, which reduces the amount interest is calculated on going forward, but the interest rate itself does not change based on partial payments.

How do I know if my interest calculation is correct?

Request a detailed account transcript from the IRS by calling 800-829-1040 or visiting irs.gov. The transcript shows every transaction, penalty, and interest charge applied to your account. You can use this to verify the calculation or dispute any charges you believe are wrong.