What Is the IRS Interest Rate for Payment Plans and Unpaid Taxes?

If you miss the deadline to pay your federal income taxes, your tax debt incurs penalties and interest on top of your principal amount. Unlike penalties, the IRS can only waive the interest fee under very rare circumstances. This simple factor can turn a manageable tax debt into a financial crisis. This interest accrues until you pay off the entire tax debt, whether you have a payment plan or don’t pay off your tax bill on time. 

The exact interest rate changes several times a year, so it’s important to know the specific interest rate for all years if you’re dealing with back taxes for different years. Let’s take a closer look at how IRS interest rates work for payment plans and To get help setting up payments, use our installment agreement services today. 

Key Takeaways

• April 15th: The IRS starts charging interest on unpaid taxes if you don’t pay your taxes in full, until the debt is fully paid.
• IRS interest rate: The IRS interest is compounded daily.
• Interest rate on underpayments for individuals 2026: 7% (adjusts quarterly)
• Form 843: If your interest is as a result of an IRS error or delay, you can file Form 843 to request an interest reduction. 
• Interest on overpayment: The IRS owes you interest if you don’t get your refund within 45 days.

Interest on IRS Payment Plans and Tax Underpayments (2026 Update)

If you owe money to the IRS where interest accrues (like with a payment plan), the interest you pay for the first quarter of 2026 (January to March) is 7%, and it compounds daily. 

If the taxpayer is a C-corporation and there’s an underpayment of taxes that exceeds $100,000, then the interest rate is 9% ( federal short-term rate plus 5%). This is 2% higher than the standard corporate underpayment rate of 7%.

Current IRS Interest Rate Vs. Earlier Interest Rates

In 2026, the IRS is maintaining the same interest rates as the last quarter of 2025. Although there has not been a huge change in interest rates over the past 3 years, we can still spot some changes. For example, the interest rate was 3% in 2021, and in 1982, it went as high as 20%. 

Here’s a comparison for the past 5 years:

The interest rate changes because the Federal Reserve sets certain interest rates that banks, other lenders, and the IRS use as a starting point for setting their own interest rates.

When the economy is growing rapidly, it often results in a rise in prices (inflation). To combat this, the Federal Reserve may raise interest rates. 

If the economy is sluggish or contracting, the Federal Reserve might reduce interest rates. This makes it cheaper to borrow money, which the Federal Reserve hopes will encourage people to borrow money and spend it.

Calculating Interest Based on Amount Due 

The IRS interest rate compounds daily. That means that interest is assessed to your account daily, and then, the next day, more interest compounds on the interest that has accrued. This cycle continues until you pay off the debt in full. 

To put this into perspective, here’s how much you’d pay in the first quarter of 2026 at a 7% interest rate based on your tax debt if you owe $25,000 in tax debt. We shall show how much the interest would affect your tax debt in a month, 6 months, and 12 months (assuming the rate remains at 7%).

At 7% APR, the daily rate is 0.00019178. Keep in mind that the interest is assessed on your tax account daily. Here are the estimates:

• First 30 days, interest grows by $144.25, and the total tax debt grows to $25,144.25
• In 182 days (6 months), interest grows by $887.50, and the total tax debt grows to $25,887.50
• In 365 days (12 months), interest grows by $1,812.50, and the total tax owed grows to $26,812.

The numbers are even higher when failure-to-pay penalties are stacked on top of the interest rate. The longer your taxes remain unpaid, the more the interest grows and the bigger your tax liability increases.

When Does Interest Start Accruing on Tax Debts? 

In most cases, the IRS starts charging interest on your account the very first day (usually April 15) you miss the payment deadline. Even if you were to apply for an extension, it wouldn’t stop the interest since it doesn’t extend the time to pay the taxes; it only extends the time to file your tax return. Even if you set up a payment plan, interest will continue to accrue on your account until the balance is paid in full.

Does the IRS pay interest, too?

What if the tables turn and now the IRS owes you? Will the IRS pay interest until it pays off the balance? Yes. 

The IRS has 45 days to pay a tax refund before it starts paying you interest. That said, in most cases, if the IRS doesn’t pay up in 45 days, it calculates interest on your overpayment from the following dates (they use the latest):

• Tax return filing return deadline 
• The date the IRS receives your late-filed tax return
• When the IRS receives your tax return in a format it can process
• The date the overpayment was made

Like you, the IRS stops paying interest when all your money is refunded (plus interest that’s due). In 2026, the 1st quarter, the IRS interest rate on overpayment is 7%

Interest Rate for Corporate Vs. Individual Taxes 

As mentioned earlier, the IRS uses a different interest rate for different taxpayers. For individual income tax balances, the IRS uses an interest rate that comes from the federal short-term rate plus 3%. That applies both to underpayments and overpayments. 

If a corporation makes an overpayment, the rate is the federal short-term rate plus 2%. For overpayments of more than $10,000, this rate drops to the federal short-term rate plus 0.5%.

If a corporation has a large underpayment (exceeding $100,000), the interest rate is the federal short-term rate plus 5%. Generally, the IRS will only accept payment plans from over a certain monetary threshold with businesses if the entity is out of business. If you set up installment payments on a large corporate debt, your interest rate is likely to be 2 points higher than it would be for a payment plan on individual income tax.

How to Calculate Your Monthly Payment With Interest 

This section is to give you a glimpse of what to expect in terms of interest when making monthly payments on your tax debt: 

Step 1: Determine how much you need to pay monthly 

To estimate your monthly payment, divide your amount due by the number of months in your payment plan. For example, if you want to pay $24,000 over 96 months, you will need to pay about $250 per month.

Step 2: Calculate the interest

As of early 2026, the IRS annual interest rate on unpaid taxes is 7%, compounded daily. 

The annual compounded interest is approximately $1,740

Divide by 12 to get the monthly interest: $1,740 ÷ 12= $145

Step 3: Add the base payment and monthly interest

Combine the base payment with the estimated interest: $250 + $145 = $395

This is your estimated monthly payment with interest. 

Step 4: Adjust for penalties (if applicable)

If the IRS applies a late-payment penalty of 0.25% monthly, you’ll need to factor in your monthly payments. This penalty is applied at the end of the month on your current balance after compounded daily interest. 

The late monthly penalty will be ~$912 annually ( ~ $76 per month)

In this case, your monthly estimated payment will be ~ $395 + $76 = $471

Keep in mind, this is just an estimate because your total interest costs will be lower over time. This is because every time you make a payment, you’re reducing the principal (underlying unpaid tax balance), which reduces the interest. Despite being just an approximation, this is an easy calculation you can do to ensure that you have enough money to make your monthly payments, even when accounting for the interest. 

Besides interest and penalties, there are other terms that you have to meet when paying for monthly agreements. Check out our guide on IRS installment agreements to learn everything. 

Ways to Reduce Penalties and Interest With the IRS Payment Plans 

It’s normal to feel helpless when dealing with the IRS and its rigid rules. However, there are still a few things you can do to reduce the interest and penalty, including:

• Paying more than your minimum payment: Each dollar you pay reduces your balance and future interest.
• Refinancing: If you qualify for a personal loan or credit with a lower rate than IRS penalties and interest, consider it.
• Request penalty or interest abatement: You can request by filling Form 843 if you qualify, especially if your tax debt grew as a result of an error made by the IRS or a reasonable cause.
• Look into Offer in Compromise: OIC allows you to pay less than you owe.
• Check if you qualify for a Partial Payment Installment Agreement (PPIA): If you qualify, you pay small monthly payments based on what you can reasonably afford until CSED.

IRS Interest Rate and Payment Plan FAQs

How does the IRS calculate interest on unpaid taxes?

Interest accrues on unpaid taxes and penalties until the balance is paid in full. The interest charged for underpayments is compounded daily. The IRS uses the federal short-term rate based on daily compounding interest to calculate the interest charged daily. 

Can I save money if I borrow money to pay off my tax bill?

It depends. If you can borrow money with an interest rate that’s lower than the applicable IRS interest rate, it might be worth looking into. For example, if you get a credit card offer with 0% interest for 18 months on any purchases made during a given time period, it’ll probably be cheaper to go with this option. 

If you decide to go this route, you need to understand the terms of this offer fully and what happens when the offer ends. Talk to a tax professional to ensure it’s the right financial move for you.

Do I always have to pay the IRS interest for unpaid tax balances?

Usually, yes. In rare instances, you can ask the IRS to reduce or remove interest. This will typically occur if you can show that the tax balance or interest was the direct result of the IRS making a mistake, giving incorrect advice, or creating an unnecessary delay. Additionally, if the IRS abates penalties from your account, they will waive any interest that accrued on those penalties.

Get Help Dealing With the IRS and Minimize Interest Payments

If you’re like most taxpayers, interest will accrue anytime that you owe the IRS money. And the interest will accrue even after you set up a payment plan. However, by making payments, you can reduce the amount you pay in interest as you’ll be lowering the underlying balance and possibly lowering any applicable penalty interest charged.

If you feel like a payment plan or installment agreement isn’t enough to help you settle your tax debt with the IRS, you can consider other options, like an offer in compromise. The tax pros at the W Tax Group provide free consultations to help you explore this and other possibilities for resolving your tax issues with the IRS.

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg