Guides

How Interest Works on Your IRS Tax Debt

IRS interest is compounded daily from the day your return was due. Here's how it's calculated, why it doesn't stop during Tax Court, and what you can do about it.

Liam Williams

14 Mar 2026 — 11 min read

If you owe the IRS, your balance is growing every day. Not because of new penalties or additional taxes—but because of interest. It starts accruing on the original due date of your return, it compounds daily, and it does not stop while your Tax Court case is pending.

That last point surprises many pro se petitioners. Filing a Tax Court petition suspends IRS assessment and collection under IRC § 6213, but it does nothing to stop interest. By the time your case resolves—which typically takes 6-18 months—the interest alone can add significantly to what you owe.

This guide explains how IRS interest works, when it starts, what the current rates are, and the limited but real options you have for reducing or stopping it.

How the Interest Rate Is Set

The IRS does not choose its interest rate arbitrarily. Under IRC § 6621, the underpayment rate for individuals is the federal short-term rate plus 3 percentage points. The federal short-term rate is determined monthly by the Treasury Department under IRC § 1274(d), rounded to the nearest whole percent, and applied for the following calendar quarter.

For Q1 2026 (January through March), the individual underpayment rate is 7%, based on a federal short-term rate of approximately 4%. (IRS News Release IR-2025-112; Revenue Ruling 2025-22)

Rates change quarterly. They are not retroactive—each quarter's rate applies only to interest accruing during that quarter. If your debt spans multiple quarters, different rates may apply to different periods. The IRS announces new rates in the IRS Newsroom, typically about two months before the new quarter begins.

A Common Misconception About Overpayment Rates

You may have heard that the IRS charges you more interest than it pays you. For individuals, that is not true. Under IRC § 6621(a), the overpayment rate and the underpayment rate for noncorporate taxpayers are both the federal short-term rate plus 3%—the same rate in both directions. The disparity between overpayment and underpayment rates exists only for corporations, where the overpayment rate is lower (federal short-term rate plus 2%).

Daily Compounding

Under IRC § 6622, IRS interest is compounded daily. That means interest accrues not just on your original tax debt, but on all previously accrued interest—every single day. Over months or years, this adds up meaningfully.

At a 7% annual rate compounded daily, here is what interest looks like on common deficiency amounts:

Original Tax Debt	6 Months	12 Months	18 Months
$5,000	~$178	~$363	~$554
$10,000	~$356	~$725	~$1,108
$25,000	~$890	~$1,813	~$2,770

An 18-month Tax Court case at 7% adds roughly 11% to the original tax liability in interest alone—before penalties.

When Interest Starts Running

Interest starts on the original due date of your return—typically April 15—not the date you actually filed. Under IRC § 6601(a), interest runs from "the last date prescribed for payment" until the date you pay in full. And IRC § 6601(b)(1) is explicit: that date is determined "without regard to any extension of time for payment or any installment agreement."

In plain English: if you filed an extension and submitted your 2023 return in October 2024, interest on any underpayment still started on April 15, 2024. Extensions give you more time to file. They do not give you more time to pay without interest.

Interest on Penalties

Interest does not run only on the tax you owe. It also runs on certain penalties.

Under IRC § 6601(e)(2), the general rule for most assessable penalties is that interest begins only after the IRS sends a notice and demand for payment—and only if you don't pay within 21 calendar days (10 business days if the amount is $100,000 or more). If you pay the penalty quickly after receiving the notice, no interest accrues on it.

But two important penalties are exceptions. Interest on the failure-to-file penalty under IRC § 6651(a)(1) and the fraud penalty under IRC § 6663 runs from the return due date—just like the underlying tax. That means if you filed late and owe a failure-to-file penalty, interest on that penalty has been accumulating since the day the return was due.

Reducing or removing a penalty also eliminates the interest that accrued on that penalty. If you think you have grounds for penalty relief, see How To Request IRS Penalty Abatement.

The 21-Day Grace Period After a Notice

When the IRS sends you a notice and demand for payment—the formal bill after assessment—you have a short window to pay without additional interest on the billed amount. Under IRC § 6601(e)(3), if you pay within 21 calendar days of the notice date, no interest accrues for the period after the notice.

If the amount on the notice is $100,000 or more, the window shrinks to 10 business days.

This grace period is more generous than many people realize. It does not wipe out all the interest that has been accruing since the return due date. But if you pay within the window, you will not be charged additional interest for the days between the notice and your payment. (Publication 556, p. 4)

Interest Does Not Stop During Tax Court

This is one of the most important—and least understood—aspects of Tax Court litigation.

When you file a Tax Court petition, IRC § 6213 suspends the IRS's authority to assess the deficiency and to collect it. That protection is critical—it prevents the IRS from taking your wages or levying your bank account while the case is pending. For a detailed explanation, see How IRC § 6213 Protects You While Your Tax Court Case Is Pending.

But IRC § 6213 says nothing about interest. And IRC § 6601 contains no provision suspending interest during Tax Court proceedings. Interest continues to accrue—from the original return due date, compounded daily—throughout the entire case. Publication 556 confirms this: interest is "generally figured from the due date of the return (excluding any extension of time to file) to the date of your payment," with no exception for pending Tax Court cases.

The same is true during IRS Appeals. If you choose to go to Appeals before or during your Tax Court case, interest continues running for the duration. Time spent in Appeals does not qualify for interest abatement.

Interest also continues during Collection Due Process hearings. A CDP hearing suspends IRS levy authority—but like Tax Court, it does nothing to pause interest.

The same applies to installment agreements, offers in compromise, and currently not collectible status. None of these arrangements stop interest from accruing. The balance continues to grow until paid in full.

This means there is a real cost to litigating. Even if you ultimately win on every issue, you may owe interest on the amount in dispute for the period between the return due date and the date the case resolves. If you lose, the interest compounds on the full deficiency for the entire litigation period.

How To Stop Interest From Accruing: IRC § 6603 Deposits

There is one way to stop interest from accruing during a Tax Court case without giving up your right to litigate: make a deposit in the nature of a cash bond under IRC § 6603.

Under this provision, you can send money to the IRS that the IRS holds—but does not treat as a payment of tax. For purposes of computing interest under IRC § 6601, the tax is "treated as paid" when the deposit is made. This effectively stops interest from accruing on the deposited amount.

The key distinction is between a deposit and a payment:

A deposit under IRC § 6603 stops interest but is not a payment of tax. It preserves your right to petition Tax Court and can be returned if you win.
A payment also stops interest but may be treated as an acknowledgment of the liability. Once the IRS mails a notice of deficiency, Publication 556 warns that money sent "without written instructions will be treated as a payment"—not a deposit.

To preserve deposit status, you must specify in writing that the amount is a "deposit in the nature of a cash bond" under IRC § 6603. Include a letter with your check stating: "This payment is submitted as a deposit in the nature of a cash bond under IRC Section 6603 for [tax year] and [docket number if applicable]. It is not a payment of tax." Send it to the IRS Service Center where you filed your return. You must make the deposit before either: (1) the close of the 90 days petition period (150 days if the notice is addressed to someone outside the United States), or (2) the date the Tax Court decision becomes final.

What Happens to the Deposit

If you win your case and the deposit is returned, you receive interest on the returned amount—but only at the federal short-term rate (4% for Q1 2026), not the full underpayment rate (7%). You lose the spread, but you avoid owing the much larger amount of underpayment interest you would have accumulated without the deposit.

If you lose, the deposit is applied to your liability. Since it stopped interest from accruing on the deposited amount, you come out ahead compared to having not made the deposit at all.

For many Tax Court petitioners, a deposit makes financial sense—especially if the amount in dispute is large and the case is likely to take many months. The question is whether you have the cash available to make the deposit. If you do, the math usually favors making it.

Interest Abatement: When the IRS Made Errors

In limited circumstances, the IRS can reduce the interest you owe. Under IRC § 6404(e), the IRS may abate interest attributable to "unreasonable error or delay" by an IRS officer or employee in performing a ministerial or managerial act.

What Counts as a Ministerial or Managerial Act

A ministerial act is a procedural or mechanical task—not involving judgment or discretion—that occurs after all prerequisites (conferences, supervisory review) are complete. Examples from IRM 20.2.7:

Unreasonable delay in transferring a case after management approval
Unreasonable delay in issuing a notice of deficiency after the examination is complete and the review process is finished

A managerial act involves administrative decisions about managing personnel or resources. Examples:

Misplacing a taxpayer's case file during examination
A supervisor sending an examiner to training without reassigning their cases, causing unreasonable delay

What Does Not Qualify

Decisions about how to apply federal tax law are neither ministerial nor managerial acts. The IRS cannot abate interest because it took a long time to research a complex legal question. Similarly, the time your case spends in IRS Appeals does not qualify—you chose to go to Appeals.

You also must not have significantly contributed to the error or delay.

How To Request Interest Abatement

File Form 843 at the IRS Service Center where your return was filed. Explain which IRS actions constituted unreasonable error or delay in performing a ministerial or managerial act, and identify the period during which you believe interest should be abated.

If the IRS denies your request, you can appeal to the IRS Independent Office of Appeals. If Appeals also denies it, the Tax Court can review the denial under IRC § 6404(h)—but only if you file your petition within 180 days of the IRS's final determination. Individuals must have a net worth of $2 million or less to use this provision.

Interest abatement is discretionary, not automatic. The IRS may abate interest—it is not required to. Set realistic expectations, and focus your request on documenting specific IRS errors or delays that extended your case beyond what was reasonable.

The 36-Month Notice Rule: Interest Suspension for Individuals

This provision is underused—and potentially valuable for anyone whose IRS audit dragged on for years.

Under IRC § 6404(g), if you filed a timely return (including extensions) and the IRS fails to send you written notice "specifically stating the taxpayer's liability and the basis for the liability" within 36 months of the later of your filing date or the return due date, interest and certain time-sensitive penalties are suspended.

The suspension period begins the day after the 36-month window closes and ends 21 days after the IRS mails the required notice. It applies separately to each notice and each item of liability.

When This Matters

If the IRS audited your 2021 return (due April 15, 2022) and did not send you a specific notice of the proposed liability until June 2026—more than four years later—interest may be suspended for the period between the 36-month mark (April 2025) and 21 days after the IRS finally sent the notice.

Exceptions

The 36-month rule does not apply to:

Tax shown on your original return
Failure-to-pay penalties under IRC § 6651
Fraud penalties
Gross misstatement penalties
Penalties for failing to disclose reportable or listed transactions
Criminal penalties

How To Claim It

File Form 843 with "Section 6404(g) Notification" written at the top. Send it to the IRS Service Center where your return was filed. (Publication 556, p. 5)

Interest Netting

If you owe the IRS money for one tax year and the IRS owes you a refund for the same or overlapping period, the interest can cancel out. Under IRC § 6621(d), for any period where interest is payable on an underpayment and allowable on an overpayment by the same taxpayer, the net rate of interest is zero on the overlapping equivalent amounts.

In practice, this means the IRS should not charge you interest on $5,000 of underpayment for a period when it simultaneously owed you interest on $5,000 of overpayment. The rates cancel out on the overlapping amount. (Publication 556, p. 6)

If you believe the IRS has not applied interest netting correctly, you can raise it through a Form 843 request.

How To Verify the IRS's Interest Calculations

The IRS's computers calculate interest automatically, and they usually get it right. But mistakes happen—especially when a case involves multiple adjustments, amended returns, or payments applied to the wrong period.

Account transcript. You can request your own account transcript through IRS.gov or by calling. It shows assessed interest amounts and payment credits, though it does not show the detailed calculation methodology.

PINEX transcript. The Penalty and Interest Explanation transcript shows the detailed interest and penalty calculations—including the rates applied and the periods covered. This is a practitioner-only transcript. You cannot get it yourself; you need a representative with Power of Attorney to request it through IRS Practitioner Priority Service. If you believe the IRS has calculated your interest incorrectly, a Low Income Taxpayer Clinic can obtain this transcript and review the math.

If you find an error, file Form 843 requesting abatement of the incorrectly assessed interest, with documentation showing the correct calculation.

What This Means for Your Tax Court Case

Interest is the hidden cost of litigation. Here is what to keep in mind:

Interest runs the entire time. From the day your return was due through the day you pay in full—including the months or years your case is pending in Tax Court or Appeals.

A deposit can stop the clock. An IRC § 6603 deposit stops interest on the deposited amount. If you have the resources, it is one of the most effective tools available.

Settling earlier saves interest. Every month your case continues, interest accrues. This does not mean you should accept a bad settlement—but it is a factor worth weighing. For guidance on the settlement process, see How To Settle Your Tax Court Case.

Reducing penalties reduces interest. If your penalties are reduced through abatement, the interest that accrued on those penalties is also eliminated.

After the decision, act quickly. Once your Tax Court case ends and the IRS sends a notice and demand, you have 21 calendar days to pay without additional interest on the assessed amount. For more on what happens after a decision, see What Happens After Your Tax Court Decision.

You still have payment options. If you cannot pay the full balance, installment agreements, offers in compromise, and currently not collectible status are all available. Interest continues during all of these—but they can make the situation manageable. See How To Resolve Your IRS Tax Debt.

Current Interest Rates (Q1 2026)

Category	Annual Rate
Individual underpayments	7%
Individual overpayments	7%
Corporate underpayments	7%
Corporate overpayments	6%
Corporate overpayments exceeding $10,000	4.5%
Large corporate underpayments (over $100,000)	9%
IRC § 6603 deposits (federal short-term rate)	4%

Source: IRS Quarterly Interest Rates; IR-2025-112

Rates are updated quarterly. Check the IRS Newsroom for the most current rates.

Resources

IRC Sections

IRS Publications and Forms

IRS Internal Revenue Manual

IRM 20.2.7—Abatement and Suspension of Underpayment Interest

Internal Cross-Links

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.