How IRS Interest Compounds Daily Under IRC 6622

Penalties stop. Interest does not. Every penalty under IRC 6651 has a 25 percent cap. Interest has no cap at all. It runs until the tax is paid, and it compounds every single day. If you owe the IRS for a long time, interest is the line that eventually outgrows everything else on the notice.

Three rules that build the number

1. When it runs. IRC 6601(a) charges interest on unpaid tax from the last date prescribed for payment to the date paid. IRC 6601(b)(1) says that date ignores extensions of time and installment agreements. For a 2025 individual return, interest starts April 15, 2026.
2. What rate. IRC 6621(a)(2) sets the underpayment rate at the federal short-term rate plus 3 percentage points. The rate is reset each calendar quarter.
3. How it compounds. IRC 6622(a) says interest is compounded daily. IRC 6622(b) carves out the estimated tax penalties under IRC 6654 and 6655, which are computed differently.

The daily compounding formula

For a stretch of days at a single annual rate, the interest factor is:

When the rate changes, you stop, compute interest to the end of the old rate period, add it to the balance, and start the next stretch on the new, larger balance. That is the compounding. Interest earns interest.

The rates you will need

Rev. Rul. 2026-15 lists the noncorporate underpayment rates. Recent quarters:

The full history back to 2022, and how each quarter's rate is set, is in IRS interest rates by quarter.

Worked example: $10,000 for 18 months

You owe $10,000 of tax on a 2024 return due April 15, 2025. You pay it on October 15, 2026. Interest runs for the 548 days after April 15, 2025. Split those days at every rate change:

The first two stretches are both at 7 percent. You could combine them into one 350-day stretch and get the same answer. Splitting at the calendar year is just good habit, because leap years change the divisor.

How much does compounding add?

Simple interest at 7 percent for 18 months on $10,000 would be $1,050. Daily compounding with the actual rates produced $1,080.40, even with a quarter at 6 percent. The extra is interest on interest.

Over one year the difference is small. Over ten years it is not. A balance left at 7 percent compounded daily roughly doubles in a little under ten years. That is about the same length as the IRS collection statute, which is a coincidence worth thinking about. See how the CSED is calculated.

Interest on penalties follows different start dates

The same daily formula applies to penalties, but the start date depends on the penalty. The failure-to-file and accuracy-related penalties draw interest from the return due date. The failure-to-pay penalty draws interest only after notice and demand. The details, with numbers, are in interest on penalties.

Payments in the middle

When you make a payment, stop the stretch on the payment date, compute interest to that day, then subtract the payment and continue. For interest purposes the IRS generally applies voluntary payments to tax, then penalties, then interest, unless you designate otherwise (Rev. Proc. 2002-26). Because payments reduce the tax first, they reduce the base that interest compounds on. See how the IRS applies payments.

When interest stops

• On full payment. IRC 6601(a) runs to the date paid.
• Within the notice grace period. IRC 6601(e)(3) says if an amount is paid within 21 calendar days of notice and demand (10 business days if $100,000 or more), no interest accrues on it after the notice date.
• Never because of time alone. Interest keeps running while you are in an installment agreement, in currently not collectible status, or in an offer in compromise investigation. Those change collection, not the interest computation.

Interest can be assessed and collected any time the underlying tax can be collected, under IRC 6601(g). When the collection statute expires, the tax and its interest expire together.

Build it in a spreadsheet

1. Column A: start date of each stretch. Break at every quarter where the rate changes, at each January 1, and at each payment.
2. Column B: days in the stretch.
3. Column C: annual rate for that quarter.
4. Column D: =(1+C/365)^B-1, or 366 in a leap year.
5. Column E: opening balance. Column F: =E*D. Next row's opening balance is E+F minus any payment.

Your result should land within a few cents of the IRS figure. Larger differences usually mean a payment dated differently on the transcript than in your records.

Worked example: a payment partway through

Real balances rarely sit untouched. Take the same $10,000 owed from April 15, 2025, but this time the taxpayer pays $4,000 on January 15, 2026, and the rest on October 15, 2026.

First stretch: April 15, 2025 to January 15, 2026, all at 7 percent. The interest is $541.50, so the balance on January 15 is $10,541.50. The $4,000 payment is applied to tax first, leaving $6,000 of tax and $541.50 of interest, a balance of $6,541.50. Interest keeps compounding on that whole balance, because accrued interest is itself part of the debt.

Second stretch: January 15 to October 15, 2026, crossing the 6 percent second quarter. Interest on $6,541.50 for that period is $334.42. The final payoff is $6,875.92. Total interest paid: $541.50 plus $334.42, or $875.92, compared with $1,080.40 if nothing had been paid until October. The early $4,000 saved $204.48 of interest.

Two things to notice. The payment did not stop interest on the interest already accrued, because the IRS applied it to tax first. And the savings are proportional to how early the money goes in. The same $4,000 paid in May 2025 would have saved more; paid in September 2026, almost nothing.

Leap years in practice

The daily factor uses the number of days in the year. For 2024, a leap year, 8 percent compounded daily for the full year produces a factor of (1 + 0.08/366)^366 - 1, which is about 8.33 percent, so $10,000 left unpaid for all of 2024 accrued about $832.78 of interest. The next leap year is 2028. If you build the computation in a spreadsheet, split every stretch at January 1 so the divisor is right for each year.

Why the IRS figure can differ by a few cents

• The IRS computes interest to a specific date printed on the notice. Recompute to the same date.
• Payments are credited as of their effective date, which may differ from the date the money left your account.
• The IRS may compute interest on penalties separately, with different start dates, and then combine them on the notice.

A one-line estimate

For a quick estimate without a spreadsheet, multiply the balance by the annual rate and the number of years, then add about 3 percent of that result for compounding at current rates. For $10,000 at 7 percent for 18 months, simple interest is $1,050; adding 3 percent of it gives about $1,082, close to the $1,080.40 computed with the actual rates. The shortcut drifts as time and rates rise, so use the full method for anything you plan to rely on.

Remember too that interest is charged on accrued interest. A balance that has been open for several years carries interest on prior interest, which is why old balances grow faster than the nominal rate suggests.

The bottom line

IRS interest is the federal short-term rate plus three points, reset quarterly, compounded daily, from the original due date until paid. It has no cap and no off switch short of payment or the end of the collection statute. If interest is the biggest number on your notice, that is a sign the strategy needs a look, not just the math.