IRS Interest Calculator | Underpayment & Refund

  • Adam
  • November 13, 2025

Calculate IRS interest on unpaid taxes, refunds & payment plans. Current 7% rate (2025), daily compound interest. Free underpayment calculator with penalties.

IRS Interest Calculator – Underpayment, Refund & Payment Plan (2025)

The IRS interest calculator helps you calculate daily compounded interest on tax underpayments, overpayments (refunds), and installment agreement payment plans. With the current IRS interest rate of 7% per year for individuals (Q4 2025), this comprehensive calculator computes penalties, interest charges, and total amounts owed based on official IRS compound interest formulas. Calculate interest on unpaid taxes, estimated tax underpayments, or expected refund interest using actual IRS quarterly rates.

💰 IRS Underpayment Interest Calculator

Calculate interest on unpaid taxes

Current IRS Rate (2025): 7% annually, compounded daily for individual underpayments
Amount of unpaid tax
Original tax payment deadline
When you will pay the tax
Current IRS rate: 7% for 2025

Your IRS Underpayment Calculation

Interest Charged
$0
Days Late
0
Original Tax Owed
$0
Total Amount Due
$0

Detailed Breakdown

Item Amount
Original Tax Owed $0
Due Date -
Payment Date -
Number of Days Late 0
Annual Interest Rate 7.0%
Daily Interest Rate 0.0192%
Interest Accrued $0
Total Amount Due $0

💵 IRS Refund Interest Calculator

Calculate interest on overpayments

Refund Interest Rate (2025): 7% annually for individual overpayments, compounded daily
Amount of tax overpayment
When you filed your return
When IRS issued refund
Current IRS rate: 7% for 2025

Your IRS Refund Interest

Interest Earned
$0
Days Delayed
0
Original Refund
$0
Total Received
$0

📅 IRS Payment Plan Interest Calculator

Calculate interest on installment agreements

Installment Plan Rate: 7% annually (federal short-term rate + 3%), compounded daily
Total tax debt amount
Your monthly installment
When plan begins
Current IRS rate: 7%

Your IRS Payment Plan Projection

Total Interest
$0
Months to Payoff
0
Total Paid
$0
Setup Fee
$31-$225

Payment Schedule Summary

How IRS Interest is Calculated

The Internal Revenue Service charges compound interest on unpaid taxes, underpayments, and late payments. Unlike simple interest, IRS interest compounds daily, meaning interest accrues on both the principal tax amount and previously accumulated interest. The IRS sets interest rates quarterly based on the federal short-term rate plus 3 percentage points.

IRS Daily Compound Interest Formula

IRS Compound Interest Calculation:

Total = Principal × (1 + Daily Rate)^Days

Where:

  • Total = Principal + accrued interest
  • Principal = Original tax amount owed
  • Daily Rate = Annual Rate ÷ 365
  • Days = Number of days from due date to payment date

Interest Amount Calculation

Simplified Interest Formula:

Interest = Principal × [(1 + r/365)^Days - 1]

This gives you the interest amount without the principal

Example IRS Interest Calculation:

Scenario: $5,000 tax owed from April 15, 2025, paid on October 15, 2025 (183 days late)

Current IRS Rate: 7% annually

Step 1: Daily rate = 7% ÷ 365 = 0.0192% = 0.000192

Step 2: Interest factor = (1 + 0.000192)^183 = 1.0356

Step 3: Total amount = $5,000 × 1.0356 = $5,178

Step 4: Interest = $5,178 - $5,000 = $178

Result: You owe $5,178 total ($5,000 tax + $178 interest)

Current IRS Interest Rates (2025)

The IRS adjusts interest rates quarterly. Here are the rates for 2025:

Quarter Period Individual Rate Corporate Underpayment
Q4 2025 Oct 1 - Dec 31 7% 7%
Q3 2025 Jul 1 - Sep 30 7% 7%
Q2 2025 Apr 1 - Jun 30 7% 7%
Q1 2025 Jan 1 - Mar 31 7% 7%

Historical IRS Interest Rates

Year Annual Average Rate Notes
2025 7% Consistent throughout year
2024 8% Elevated due to Fed rates
2023 7-8% Increased from 7% to 8% in Q4
2022 3-6% Rose sharply during year
2021 3% Historically low rates
2020 3-5% Dropped due to pandemic

How IRS Sets Interest Rates: The IRS interest rate is calculated as the federal short-term rate (set by U.S. Treasury) plus 3 percentage points. This rate applies to both underpayments (what you owe the IRS) and overpayments (what the IRS owes you in refunds). The rate is adjusted quarterly and published in IRS revenue rulings.

IRS Payment Plan Interest Rates

When you establish an installment agreement with the IRS to pay tax debt over time, interest continues to accrue on the unpaid balance:

Installment Agreement Features

  • Interest Rate: Same as underpayment rate (7% for 2025)
  • Daily Compounding: Interest compounds daily on remaining balance
  • Setup Fees: $31 (direct debit) to $225 (standard agreements)
  • No Additional Penalty: Failure-to-pay penalty reduced to 0.25% per month (from 0.5%)
  • Maximum Terms: Up to 72 months (6 years) for debts under $50,000

Cost Comparison: Payment Plan vs. Immediate Payment

Example: $10,000 tax debt paid over different timeframes at 7% interest:

  • Pay Immediately: $10,000 total (no interest)
  • Pay in 6 months: $10,355 total ($355 interest)
  • Pay in 12 months: $10,729 total ($729 interest)
  • Pay in 24 months: $11,489 total ($1,489 interest)
  • Pay in 36 months: $12,281 total ($2,281 interest)

⚠️ Payment Plan Reality: While IRS payment plans provide relief for those who can't pay immediately, the daily compounding interest significantly increases total cost. On a $10,000 debt, a 3-year payment plan costs an extra $2,281 in interest. If possible, pay as quickly as you can afford, or consider alternatives like personal loans (may have lower rates) or credit card 0% APR offers for smaller debts.

IRS Refund Interest Calculation

If the IRS takes too long to issue your refund, they owe YOU interest on the overpayment:

When IRS Pays Interest on Refunds

  • E-File Returns: Interest starts accruing 45 days after April 15 deadline or filing date (whichever is later)
  • Paper Returns: Interest starts 45 days after April 15 or filing date
  • Amended Returns: Interest from original due date or filing date
  • Rate: 7% annually for individuals (same as underpayment rate in 2025)
  • Compounding: Daily compound interest

Refund Interest Example

You filed on April 15, 2025 and IRS didn't issue your $3,000 refund until September 15, 2025 (108 days after the 45-day grace period):

  • Grace Period Ends: May 30, 2025
  • Interest Period: May 30 - Sep 15 = 108 days
  • Interest Earned: $3,000 × [(1 + 0.07/365)^108 - 1] = $62
  • Total Refund: $3,062 ($3,000 + $62 interest)

Good News for Taxpayers: IRS refund interest is taxable income and will be reported on Form 1099-INT the following year. However, receiving interest means the IRS took longer than allowed to process your refund, which is relatively rare with modern e-filing and direct deposit systems.

Underpayment Penalties vs. Interest

Many taxpayers confuse IRS interest with penalties—they're different charges:

IRS Interest (IRC Section 6621)

  • Purpose: Compensates government for time value of money
  • Rate: 7% annually (Q4 2025), compounded daily
  • Cannot Be Waived: IRS cannot waive interest charges
  • Applies To: All unpaid tax from due date until paid

Failure-to-Pay Penalty (IRC Section 6651)

  • Amount: 0.5% of unpaid tax per month (maximum 25%)
  • Accrual: Starts from due date, calculated monthly
  • Can Be Waived: IRS may waive for reasonable cause
  • Reduced Rate: 0.25% per month if on installment agreement

Failure-to-File Penalty

  • Amount: 5% of unpaid tax per month (maximum 25%)
  • When Applied: If you don't file return by deadline
  • Minimum: $435 or 100% of tax owed (whichever is less) if 60+ days late
  • Combines With: Failure-to-pay penalty (but total capped at 5% per month)

Total Cost Example: $10,000 tax owed, not filed or paid for 12 months:

  • Failure-to-File Penalty: $2,500 (25% cap reached in 5 months)
  • Failure-to-Pay Penalty: $600 (6% for 12 months)
  • Interest (7%): ~$729 (compounded daily for 365 days)
  • Total Owed: $13,829 ($10,000 + $2,500 + $600 + $729)

Key Lesson: Always file on time even if you can't pay—failure-to-file penalty is 10× worse than failure-to-pay!

Frequently Asked Questions

What is the current IRS interest rate for 2025?
The IRS interest rate for individual taxpayers is 7% per year for all four quarters of 2025 (January 1 through December 31, 2025). This rate applies to both underpayments (taxes you owe) and overpayments (refunds owed to you). The rate is compounded daily, not annually, which means interest accrues on both principal and accumulated interest. Corporate underpayments are also 7%, while corporate overpayments are 6%. Large corporate underpayments face 9% interest. The IRS sets rates quarterly based on federal short-term rate plus 3%.
How is IRS interest calculated and compounded?
IRS interest uses daily compound interest formula: Total = Principal × (1 + Annual Rate ÷ 365)^Days. Example: $5,000 owed for 183 days at 7% annual rate: Daily rate = 0.000192 (7% ÷ 365), Interest factor = (1.000192)^183 = 1.0356, Total = $5,000 × 1.0356 = $5,178, Interest = $178. Interest compounds every day, meaning each day's interest becomes part of the base for calculating next day's interest. This is more costly than simple interest—on $10,000 for one year at 7%, simple interest = $700, but compound interest = $729.
How much interest does IRS charge on payment plans?
IRS installment agreements charge 7% annual interest (2025 rate) compounded daily on the unpaid balance. Interest accrues until debt is fully paid. Example: $10,000 debt paid over 24 months with $450 monthly payments accumulates ~$1,489 in interest, making total repayment $11,489. Additionally, setup fees range from $31 (direct debit) to $225 (standard agreement). Low-income taxpayers may get fee waivers. The failure-to-pay penalty is reduced from 0.5% to 0.25% per month while on approved payment plan. Interest cannot be waived—it's mandatory by law (IRC Section 6621).
Can IRS interest charges be waived or reduced?
No, the IRS cannot waive or reduce interest charges. Interest is mandated by federal law (Internal Revenue Code Section 6621) and cannot be abated even for reasonable cause. This differs from penalties, which can be waived if you have reasonable cause (serious illness, death in family, natural disaster, etc.). However, if the IRS made an error causing delay, or if you were given incorrect written advice from the IRS, you may qualify for interest abatement. Also, if penalties are removed, any interest calculated on those penalties is also removed. Bottom line: Pay as quickly as possible to minimize interest.
When does the IRS pay interest on refunds?
The IRS pays interest on refunds if they don't issue payment within 45 days of the later of: 1) April 15 tax deadline, or 2) your actual filing date. For e-filed returns filed on April 15, 2025, interest starts accruing on May 30, 2025. For returns filed later, interest starts 45 days after filing date. The interest rate is 7% annually (2025), compounded daily. Example: $3,000 refund delayed 108 days earns ~$62 interest. IRS refund interest is taxable income reported on Form 1099-INT. With modern e-filing and direct deposit, most refunds arrive within 21 days, so refund interest is rare.
What is the difference between IRS interest and penalties?
IRS interest (IRC 6621) compensates for time value of money—currently 7% annually, compounded daily, cannot be waived, and applies to all unpaid taxes. IRS penalties are separate charges: Failure-to-File Penalty is 5% per month (25% max) for not filing return; Failure-to-Pay Penalty is 0.5% per month (25% max) for unpaid taxes, reduced to 0.25% if on payment plan. Penalties CAN be waived for reasonable cause. Interest applies to both original tax AND penalties. Example: $10,000 unpaid for 12 months = $729 interest + $600 failure-to-pay penalty + potentially $2,500 failure-to-file penalty.
How can I minimize IRS interest charges?
Minimize IRS interest by: 1) Pay immediately—even if you can't pay full amount, pay as much as possible now to reduce principal, 2) File on time—filing prevents failure-to-file penalty (5%/month) even if you can't pay, 3) Request payment plan quickly—reduces failure-to-pay penalty from 0.5% to 0.25% per month, 4) Make estimated tax payments—prevents underpayment if you're self-employed or have other income, 5) Consider alternatives—credit cards with 0% APR or personal loans may have lower effective rates than 7% IRS interest, 6) Request Offer in Compromise if you qualify—settle debt for less than owed. Most important: Never ignore IRS notices—interest and penalties compound rapidly.

IRS Payment Options to Minimize Interest

If you can't pay your tax bill immediately, consider these options:

Short-Term Payment Plan (120 days)

  • No Setup Fee: Free if you pay within 120 days
  • Interest Accrues: 7% annual rate continues to compound
  • Best For: Debts under $100,000 when you can pay quickly
  • Application: Call IRS or apply online through IRS.gov

Long-Term Payment Plan (Installment Agreement)

  • Setup Fee: $31 (direct debit) to $225 (standard)
  • Maximum Term: 72 months for debts under $50,000
  • Interest: 7% compounded daily throughout plan
  • Penalty Reduction: Failure-to-pay drops to 0.25%/month

Offer in Compromise

  • Settle for Less: Pay reduced amount to settle full debt
  • Qualification: Doubt as to collectibility or liability
  • Application Fee: $205 (waived for low-income)
  • Success Rate: Only ~40% of applications accepted
  • Stops Interest: Once accepted and paid, remaining debt forgiven

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