IRC 6601: Imposition of Interest on Underpayments

IRC 6601(a) states the basic rule: if any amount of tax imposed by the Code is not paid on or before the last date prescribed for payment, interest on that amount shall be paid for the period from the last date prescribed for payment to the date paid. The phrase "last date prescribed for payment" is controlling. For most individual income tax liabilities, this is April 15 of the year following the tax year -- the original due date of the return, not any extension date.

Interest is not a penalty. Congress imposes interest on underpayments as compensation to the government for the time value of money on amounts that should have been paid but were not. Because interest is remedial rather than punitive, it is not subject to the "reasonable cause" defenses that apply to penalties under IRC 6651, IRC 6656, or IRC 6662. A taxpayer who had every legitimate reason for failing to pay on time still owes the interest that accrued.

Critical: Interest start date is not the assessment date Interest under IRC 6601 begins accruing on the day after the prescribed last payment date -- typically April 16 for a calendar-year individual -- not the date the IRS sends a notice of deficiency, not the date an audit closes, and not the date a balance-due notice is mailed. A practitioner computing an OIC payoff or installment agreement balance must calculate interest from the original due date. Using the audit-closing date or the assessment date understates the interest liability and may lead to an incorrect offer amount, which the IRS can reject.

The IRS assesses interest when it assesses the underlying tax deficiency, but the interest computation runs from the original due date. Under IRC 6601(e)(1), interest also accrues on any interest that has been assessed and remains unpaid -- that is, interest on interest. And under IRC 6601(e)(2)(A), interest accrues on unpaid penalties from the date of the assessment of the penalty.

Interest accrues whether or not the taxpayer received a notice. If the IRS failed to send a notice for years, interest has been running throughout that period (subject only to the IRC 6404(g) suspension rule discussed in the Appendix section).

IRC 6621: How the Quarterly Interest Rate is Set

IRC 6621(a)(2) sets the underpayment interest rate at the federal short-term rate plus 3 percentage points. The federal short-term rate is determined under IRC 1274(d) for the first month of each calendar quarter, rounded to the nearest whole percentage point. The IRS announces the applicable rate for each quarter in a Revenue Ruling typically published in the month before the quarter begins:

  • Q1 (January - March): announced in December of the prior year.
  • Q2 (April - June): announced in March.
  • Q3 (July - September): announced in June.
  • Q4 (October - December): announced in September.

The Revenue Rulings are available at IRS.gov and in the Internal Revenue Bulletin. The IRS also maintains a summary table of quarterly interest rates on its website. Practitioners computing interest on a multi-year underpayment must apply each quarter's rate to the outstanding balance for the days in that quarter, because the rate may change from quarter to quarter.

Caution: Rate changes every quarter The underpayment interest rate under IRC 6621 is not a fixed annual rate. It is reset for each calendar quarter based on the federal short-term rate in the preceding month. Always pull the current quarter's rate directly from IRS.gov or the most recent Revenue Ruling. A rate that applied in Q1 may not apply in Q2. Using a stale rate in a multi-quarter computation produces an inaccurate result.

Quarterly Rate History and Rate-Tier Comparison

The table below shows published IRS underpayment and overpayment interest rates for recent quarters, followed by a rate-tier comparison summarizing the rate applicable to each taxpayer category. Historical rates through Q2 2026 reflect IRS Revenue Rulings; Q3 and Q4 2026 should be verified at IRS.gov before use.

IRS Interest Rates by Quarter (IRC 6621) and Rate-Tier Summary
Quarter Fed Short-Term Rate Individual Underpayment (Fed + 3%) Individual Overpayment (Fed + 3%) Corporate Overpayment over $10K (Fed + 0.5%) Notes
Q1 2024 (Jan-Mar) 5% 8% 8% 5.5% Rev. Rul. 2023-22
Q2 2024 (Apr-Jun) 5% 8% 8% 5.5% Rev. Rul. 2024-6
Q3 2024 (Jul-Sep) 5% 8% 8% 5.5% Rev. Rul. 2024-12
Q4 2024 (Oct-Dec) 5% 8% 8% 5.5% Rev. Rul. 2024-18
Q1 2025 (Jan-Mar) 4% 7% 7% 4.5% Rev. Rul. 2024-24
Q2 2025 (Apr-Jun) 4% 7% 7% 4.5% Rev. Rul. 2025-6
Q3 2025 (Jul-Sep) 4% 7% 7% 4.5% Rev. Rul. 2025-12
Q4 2025 (Oct-Dec) 4% 7% 7% 4.5% Rev. Rul. 2025-18
Q1 2026 (Jan-Mar) 4% 7% 7% 4.5% Rev. Rul. 2025-24
Q2 2026 (Apr-Jun) 4% 7% 7% 4.5% Rev. Rul. 2026-6
Q3 2026 (Jul-Sep) Verify at IRS.gov -- rate not yet confirmed at time of publication Rev. Rul. forthcoming
Q4 2026 (Oct-Dec) Verify at IRS.gov -- rate not yet announced Rev. Rul. forthcoming
Rate Tiers by Taxpayer Category (Illustrative at 4% Federal Short-Term Rate)
Individual underpayment 4% 7% N/A N/A IRC 6621(a)(2)
Corporate underpayment (at or below $100K) 4% 7% N/A N/A IRC 6621(a)(2)
Corporate underpayment (over $100K, during LCU surcharge period) 4% 11% (fed + 8%) N/A N/A IRC 6621(c); applies after 30-day letter
Individual/non-corporate overpayment 4% N/A 7% N/A IRC 6621(a)(1)
Corporate overpayment (at or below $10K) 4% N/A 7% N/A IRC 6621(a)(1)
Corporate overpayment (over $10K) 4% N/A N/A 4.5% IRC 6621(a)(1); reduced rate for excess
Sources: IRS Revenue Rulings as cited. Historical quarterly rates through Q2 2026 reflect published rulings; verify all rates at IRS.gov before use in any client computation. The federal short-term rate is rounded to the nearest whole percentage point under IRC 6621(b). Rates shown are annual rates; interest computes daily under IRC 6622.

IRC 6622: Daily Compounding of Interest

IRC 6622 requires that interest under IRC 6601 be compounded daily. This has a material effect on long-outstanding balances. The daily interest factor is derived from the annual rate: a balance outstanding for one day grows by (annual rate / 365) of the balance (or more precisely, by (1 + annual rate)^(1/365) - 1). Because interest accrues on the prior day's balance (including previously accrued interest), the effective annual rate under daily compounding exceeds the stated annual rate.

At an 8% annual rate with daily compounding, the effective annual growth factor is approximately 8.33%. At a 7% annual rate, it is approximately 7.25%. These differences are modest over one year but compound into meaningful amounts over multiple years:

  • A $100,000 underpayment at 8% with daily compounding grows to approximately $108,330 after one year, $117,350 after two years, and $127,020 after three years.
  • A $500,000 underpayment at 8% with daily compounding grows to approximately $541,650 after one year and $638,600 after three years.
  • A $1,000,000 underpayment at 8% with daily compounding grows to approximately $1,083,300 after one year and $1,277,200 after three years.
Practice note: Long-outstanding balances grow faster than clients expect Under IRC 6622, interest compounds daily. A client with a $500,000 underpayment who has been ignoring IRS notices for two years may now owe more than $585,000 in interest alone before accounting for any penalties. An accurate interest computation is essential before recommending an OIC or installment agreement -- and before the client decides whether to pay the balance, contest the liability, or pursue abatement.

Practitioners should use the IRS's own interest computation or verified tax practice software to compute the precise daily-compounded interest amount for any client matter. Manual calculations using simplified formulas are useful for estimation but should be reconciled against the IRS account transcript before finalizing an offer or installment agreement amount.

IRC 6621(c): Large-Corporate Underpayment Surcharge

IRC 6621(c) imposes an additional 5 percentage points on large corporate underpayments, bringing the total rate to the federal short-term rate plus 8 percentage points. A "large corporate underpayment" is a C corporation tax underpayment that exceeds $100,000 for any taxable period.

The surcharge does not apply to the entire underpayment -- it applies only to the amount above $100,000. And it does not apply immediately: the higher rate begins only after the IRS mails the corporation a "30-day letter" (typically a Letter 3523 or a similar formal notice of proposed deficiency) and applies from the date of that letter through the date the underpayment is paid.

Critical: The LCU surcharge applies to the full amount over $100K during the trigger window Under IRC 6621(c), once the IRS sends the 30-day letter, the rate on the amount of the C corporation's underpayment exceeding $100,000 jumps to the federal short-term rate plus 8 percentage points for every day from the letter date until the underpayment is paid. At a 4% federal short-term rate, this means 11% annual interest (compounded daily) on the excess amount, compared to 7% before the letter. Practitioners advising C corporations in IRS examination should identify when the underpayment might cross the $100,000 threshold and should advise the corporation of the date and cost consequences of allowing the examination to proceed to the 30-day-letter stage without payment. The corporation can avoid the surcharge entirely by paying the disputed amount before the IRS sends the notice.

LCU Surcharge: Practical Steps

  1. Identify whether the client is a C corporation (the LCU surcharge does not apply to S corporations, partnerships, individuals, or trusts).
  2. Compute the likely total deficiency. If it exceeds $100,000 for any taxable period, the LCU trigger is in play.
  3. Monitor the examination for the issuance of any 30-day letter (revenue agent report cover letter or formal Notice of Proposed Deficiency). The date of the letter starts the clock.
  4. Advise the corporation: paying the excess above $100,000 before the letter is issued avoids the 5-point surcharge entirely.
  5. If the letter has already issued, compute the cost of the surcharge against the expected resolution timeline. In many cases, paying and filing a refund claim is less expensive than continuing the dispute.

Overpayment Interest Under IRC 6621(a)(1) and IRC 6611

For non-corporate taxpayers, the overpayment interest rate under IRC 6621(a)(1) is the same as the underpayment rate: federal short-term rate plus 3 percentage points. The symmetry applies to individuals, estates, trusts, and S corporations (at the entity level, which passes through to shareholders).

For C corporations, the overpayment rate is asymmetric. Under IRC 6621(a)(1), corporate overpayments exceeding $10,000 earn interest at the federal short-term rate plus only 0.5 percentage points -- far below the 3-point premium the same corporation pays on underpayments.

Caution: Overpayment interest is asymmetric for corporations A C corporation that overpaid its estimated taxes earns only the federal short-term rate plus 0.5% on the excess above $10,000, while it pays the federal short-term rate plus 3% (and potentially plus 8% after a 30-day letter) on underpayments. At a 4% federal short-term rate, the corporation earns 4.5% on its overpayment refund but would owe 7% (or 11%) on any underpayment. This asymmetry means C corporations have a strong economic incentive to avoid overpaying estimated taxes rather than relying on a year-end refund to recover the overpayment with interest.

IRC 6611: The 45-Day No-Interest Window

Under IRC 6611(e), the IRS does not pay overpayment interest for the period before the 45th day after the later of: (1) the date the return was due (without extension); or (2) the date the return was filed. If the IRS processes and issues the refund within 45 days of the later of these dates, no interest is owed at all. This 45-day window applies to all taxpayers, not just corporations.

Practitioners filing amended returns or refund claims under IRC 6511 for clients should advise that any overpayment interest will begin accruing only after the 45-day window, and that the government's obligation to pay overpayment interest is limited and does not compensate for the full period the IRS held the taxpayer's money if the IRS acts within the window.

Interest in OIC and CDP Computations

One of the most common practitioner errors in tax resolution work is failing to account for continuing interest accrual when computing a client's total liability for an OIC or installment agreement.

Practice insight: OIC computations must include interest through the projected acceptance date When computing the reasonable collection potential for a doubt-as-to-collectibility OIC under IRC 7122, interest under IRC 6601 continues to accrue on the underlying tax liability throughout the OIC investigation period. A standard OIC investigation runs 6 to 12 months; in complex cases or during high-volume IRS periods, investigations can extend 18 months or longer. The OIC payoff amount must include interest accrued from the original due date through the anticipated acceptance and payment date. Practitioners who compute RCP against only the assessed tax balance, without projecting interest through acceptance, submit offers that the IRS will reject or supplement. On a $500,000 liability at 7% daily compounding, 12 months of additional interest exceeds $36,000 -- a material number that affects the minimum offer calculation.

Interest also continues to accrue during a CDP hearing under IRC 6330. A CDP hearing suspends levy action but does not suspend interest. Taxpayers who use CDP hearings as a delay mechanism often find that the amount they owe is substantially higher at the conclusion of the hearing than when they filed the request.

For installment agreements, interest continues to accrue on the unpaid balance throughout the agreement period, as does the failure-to-pay penalty (though the penalty rate is reduced to 0.25% per month under IRC 6651(h) while the agreement is in effect). Practitioners should model the total interest cost of an installment agreement for the client, particularly if the proposed agreement term is long, so that the client can compare the total cost against a lump-sum OIC or a partial-pay installment agreement.

IRC 6404 Interest Abatement Interplay

IRC 6404(e) authorizes the IRS to abate interest attributable to unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act. This remedy is available but narrow: it requires a showing of specific IRS error or delay, not merely a showing that the taxpayer had reasonable cause for failing to pay.

The distinction matters in practice. A taxpayer who had a legitimate dispute about the amount of tax owed and who kept meticulous records of their own compliance may still owe interest from the original due date -- because interest is not a penalty and reasonable cause is not a defense. However, if the IRS lost the taxpayer's submitted Form 2848, failed to process a timely response to an information document request, or left the case unassigned for an extended period due to a staffing issue, the interest that accrued during the IRS's delay may be abatable under IRC 6404(e).

Separately, IRC 6404(g) automatically suspends interest (rather than abating it) when the IRS fails to send a notice of liability within 18 months of the later of the return due date or the filing date. The suspension applies from the 18-month mark through 21 days after the IRS eventually sends the required notice.

For the complete procedure -- including the ministerial-act standard, Form 843 filing, and Tax Court review under IRC 6404(h) -- see our full guide: IRC 6404 interest abatement for IRS error and delay.

Appendix: IRC 6631 -- Notice of Interest Charges

IRC 6631 requires the IRS to include, in any notice to a taxpayer that includes an interest charge, a statement identifying: (1) the Code section imposing the interest; (2) the beginning and ending dates of the computation period; (3) the amount of tax on which interest is computed; (4) the applicable interest rate for each period; and (5) the total interest charge.

The IRC 6631 disclosure requirement is a transparency and verification tool for practitioners. When a client receives a notice with an interest charge, the practitioner should reconcile the IRS's disclosure against the actual applicable quarterly rates and the daily compounding formula:

  • Confirm that the IRS used the correct quarterly rate for each period.
  • Confirm that the IRS computed interest from the correct start date (the original due date, not the assessment date).
  • Confirm that the IRS applied daily compounding under IRC 6622.
  • If the IRS notice omits any of the required IRC 6631 elements, note the deficiency and request a corrected notice or a detailed interest computation from the IRS.

A procedural defect in the IRC 6631 notice does not eliminate the taxpayer's obligation to pay the interest, but it may support an argument in a CDP hearing or an appeals proceeding that the IRS has not properly substantiated the interest amount. Verify current IRC 6631 requirements and the IRS's current notice format at IRS.gov and in IRM 20.2.4 before asserting any procedural argument based on a notice deficiency.

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Frequently Asked Questions: IRS Interest on Underpayments

  • What is IRC 6601 interest and when does it start accruing?

    IRC 6601(a) imposes interest on any unpaid tax from the last date prescribed for payment until the date paid. For calendar-year individuals, that start date is typically April 16 -- the day after the April 15 return and payment due date. Interest does not wait for an IRS notice, an audit conclusion, or a balance-due letter. If the tax was due April 15, 2022, and remains unpaid, interest has been compounding daily since April 16, 2022. Practitioners computing payoffs for OIC, installment agreements, or CDP hearings must calculate interest from the original due date, not the assessment date or the date of any IRS notice. Verify current IRS accrual rules in IRM 20.2.4 at IRS.gov.

  • How is the interest rate determined under IRC 6621?

    Under IRC 6621(a)(2), the underpayment rate is the federal short-term rate plus 3 percentage points. The IRS determines the federal short-term rate for each calendar quarter based on the short-term AFR under IRC 1274(d) for the first month of the quarter, rounded to the nearest whole percentage point, and publishes it in a Revenue Ruling before each quarter begins. Always pull the current quarter's rate from IRS.gov; the rate changes each quarter and a prior-quarter rate may produce an inaccurate computation.

  • How does daily compounding under IRC 6622 work?

    IRC 6622 requires interest to compound daily. Each day's interest is calculated on the prior day's balance (tax plus previously accrued interest), not on the original tax amount. At an 8% annual rate with daily compounding, a $100,000 underpayment grows to approximately $108,330 after one year, $117,350 after two years, and $127,020 after three years -- exceeding what a simple 8% per year calculation would produce. For large balances held over multiple years, the daily compounding effect is material. Use IRS-provided tools or verified tax software to compute the precise amount before finalizing any OIC or agreement.

  • What is the large-corporate underpayment surcharge under IRC 6621(c)?

    Under IRC 6621(c), a C corporation with a tax underpayment exceeding $100,000 pays interest at the federal short-term rate plus 8 percentage points (instead of plus 3) on the amount above $100,000. The surcharge applies only after the IRS sends a 30-day letter; it runs from the letter date through the payment date. The corporation can avoid the surcharge by paying the disputed amount before the 30-day letter is issued. Practitioners advising C corporations in examination should monitor the $100,000 threshold and the examination stage carefully, as the economic cost of the surcharge can be substantial.

  • How does interest differ for underpayments vs. overpayments?

    For non-corporate taxpayers, the underpayment and overpayment rates are the same: federal short-term rate plus 3 points. For C corporations, overpayments exceeding $10,000 earn interest at only the federal short-term rate plus 0.5%, far below the underpayment rate. Additionally, under IRC 6611(e), the IRS pays no overpayment interest for the first 45 days after the return due date or filing date (whichever is later). If the IRS issues the refund within that window, the taxpayer receives no interest compensation at all.

  • How does a practitioner find the current quarterly interest rate?

    The IRS announces the quarterly underpayment interest rate in a Revenue Ruling published before each quarter's start date. Revenue Rulings are available at IRS.gov under the Newsroom and Tax Professionals sections. The IRS also maintains a rate table at IRS.gov showing current and historical quarterly rates. For a multi-year underpayment, the practitioner must obtain the complete historical rate table and apply each quarter's rate to the outstanding balance (including compounded interest) for the days in that quarter. Verify all rates directly from IRS.gov before finalizing any interest computation for a client matter.

  • How is IRS interest treated in an OIC computation?

    Interest under IRC 6601 continues to accrue during the OIC investigation period, which typically runs 6 to 12 months or longer. The total liability for RCP purposes includes all accrued interest through the anticipated OIC payment date. Practitioners who compute RCP against only the tax balance, without projecting interest through acceptance, understate the liability and may submit a low offer that the IRS rejects. On a $500,000 liability at 7% daily compounding, 12 months of interest adds approximately $36,000 to the required offer amount. For the full OIC statutory framework and RCP methodology, see the guide on IRC 7122 offer in compromise and reasonable collection potential.

  • What is IRC 6404 interest abatement and when is it available?

    IRC 6404(e) allows the IRS to abate interest attributable to unreasonable IRS error or delay in performing a ministerial or managerial act. Ministerial acts are procedural tasks with no discretionary element (losing a file, failing to process a submitted form). Managerial-act abatement is narrower and less frequently granted. Unlike penalty abatement, interest abatement does not require showing that the taxpayer had reasonable cause; it requires showing that the IRS made a specific error or caused a specific delay that generated unnecessary interest accrual. A separate provision, IRC 6404(g), automatically suspends interest when the IRS fails to send a notice of liability within 18 months of the return due date or filing date. Claims are filed on Form 843. Denials may be reviewed by the Tax Court under IRC 6404(h). For the full procedure, see the guide on IRC 6404 interest abatement for IRS error and delay.

  • Does interest accrue during a CDP hearing?

    Yes. A CDP hearing under IRC 6330 suspends IRS levy action but does not suspend interest accrual. Interest under IRC 6601 continues to compound daily throughout the CDP process, including any Tax Court appeal of the CDP determination. Similarly, a Tax Court petition contesting a notice of deficiency under IRC 6213 prohibits the IRS from collecting the deficiency but does not stop interest from running. Practitioners should advise clients at the start of any CDP or Tax Court proceeding that the total liability is increasing daily, and factor this into the analysis of whether to pay, contest, or settle.

  • What is the IRC 6631 notice requirement?

    IRC 6631 requires the IRS to include in any interest-bearing notice a disclosure identifying the applicable Code section, the computation period, the tax amount on which interest runs, the applicable rate for each period, and the total interest charged. This disclosure allows practitioners to verify the IRS's computation. If the IRS notice omits required IRC 6631 elements, the practitioner should request a corrected notice or a detailed interest computation before advising the client to pay. A notice defect does not eliminate the interest obligation but may be relevant in CDP hearings or appeals proceedings.

  • How do penalties and interest interact on a tax balance?

    Penalties and interest are independent charges. Under IRC 6601(e)(2)(A), interest also accrues on unpaid penalties -- meaning a taxpayer facing a failure-to-pay penalty under IRC 6651(a)(2) or an accuracy-related penalty under IRC 6662 owes interest on the penalty amount in addition to interest on the underlying tax. The failure-to-pay penalty accrues at 0.5% per month (capped at 25% after 50 months), reduced to 0.25% per month under IRC 6651(h) while a compliant installment agreement is in effect. An accuracy-related penalty under IRC 6662 is assessed as a lump sum and then accrues interest from the assessment date. Practitioners computing a client's total OIC or installment agreement liability must account for tax, all assessed penalties, and interest on each component. For the accuracy-related penalty framework, see the guide on IRC 6662 accuracy-related penalties. For the failure-to-file and failure-to-pay penalty framework, see the guide on IRC 6651 failure-to-file and failure-to-pay penalties.