What Are the IRS Interest Rates for Payment Plans and Unpaid Taxes?

The IRS charges interest on unpaid taxes from the day the balance is due, and it compounds daily. For the third quarter of 2026 (July 1 through September 30), the individual underpayment rate is 7%, up from 6% in the second quarter.

That interest keeps running even after you set up a payment plan, and unlike penalties, it almost never gets waived. The longer a balance sits, the faster it grows. Here’s exactly what the IRS charges, what a payment plan really costs, and how to bring the total down.

Key Takeaways

• For Q3 2026 (July 1 to September 30), the IRS individual interest rate is 7% per year, compounded daily.
• Interest starts on the tax due date and runs until the balance is paid in full, even on a payment plan.
• The failure-to-pay penalty is 0.5% per month (0.25% on an approved plan), and it’s separate from interest.
• The IRS rarely waives interest. It’s set by law.
• Paying down the principal faster is the most direct way to cut the total cost.

What Is the Current IRS Interest Rate? (2026)

For the third quarter of 2026, the IRS charges 7% annual interest on unpaid individual taxes, compounded daily. It pays the same 7% on overpayments, the interest it owes you when a refund runs late.

The IRS resets these rates every quarter. Here’s how 2026 has gone so far:

Because the rate moves, check the IRS quarterly interest rates page for the latest figure before you run any numbers.

How the IRS Sets and Calculates Interest

The individual underpayment rate is the federal short-term rate plus 3 percentage points. That’s how Q3 2026 lands at 7%: a 4% short-term rate plus 3.

Interest compounds daily, and the IRS applies it to your original tax plus any interest already added. That daily compounding makes the effective annual rate slightly higher than the stated 7%.

At 7%, a $10,000 balance accrues about $1.92 a day when you start paying it off. That number shrinks as the principal drops.

IRS Interest on Payment Plans: What a Plan Actually Costs

A payment plan does not stop interest. It keeps accruing on whatever you still owe until the balance hits zero. What a plan changes is the penalty and the fees.

There are two main types:

• Short-term plan: up to 180 days to pay in full, with no setup fee. Interest and penalties still accrue.
• Long-term installment agreement: monthly payments over a longer stretch. Setup fees run $22 if you apply online with direct debit, or $69 online without direct debit. Applying by phone or mail costs more. Low-income taxpayers pay $43, and the fee is waived or reimbursed with direct debit.

Getting on an IRS installment agreement also cuts the failure-to-pay penalty in half, from 0.5% to 0.25% a month. The IRS lists the full fee schedule on its payment plans page.

How to Estimate Your Monthly Payment With Interest

Here’s a rough way to ballpark a monthly payment. It’s an approximation, since daily compounding and your exact penalties shift the real number, but it gives you a working figure.

Example: $10,000 balance, 60-month plan, 7% annual rate

• Step 1, base payment. $10,000 ÷ 60 = $166.67 a month toward principal.
• Step 2, monthly interest. $10,000 × 7% = $700 a year, or about $58 a month at the start.
• Step 3, add them. $166.67 + $58 = about $225 a month.
• Step 4, add the reduced penalty. At 0.25% a month on an approved plan, $10,000 × 0.25% = $25. Total: roughly $250 a month early on.

Both the interest and the penalty shrink as you pay down the balance, so your monthly total drops over time.

Interest doesn’t stop until the balance does. A free, confidential consultation will show you the fastest realistic way to clear what you owe. Contact us to find out where you stand.

IRS Penalties vs. Interest on Unpaid Taxes

Interest and penalties are two separate charges, and both run until you pay.

• The failure-to-pay penalty is 0.5% of the unpaid tax per month, capped at 25%. On an approved installment agreement, it drops to 0.25%.
• The failure-to-file penalty is steeper: 5% per month, also capped at 25%. When both hit in the same month, the IRS trims the failure-to-file penalty by the failure-to-pay amount so you’re not charged twice on the overlap.

Penalties can sometimes be removed through reasonable-cause relief or First-Time Abatement. If you have a clean filing history or a genuine hardship, penalty abatement is worth exploring. The IRS explains how the failure-to-pay penalty works in detail. Interest is a harder case, which is the next question.

Can IRS Interest Ever Be Waived?

Rarely. Interest is set by statute, and the IRS can only abate it in narrow situations.

Under IRC Section 6404(e), the IRS can remove interest when one of its own employees made a ministerial or managerial error that caused an unreasonable delay in your case. A separate rule, Section 6404(f), lets the IRS abate penalties, not interest, when it gave you incorrect written advice that you relied on.

What won’t get interest waived: not being able to afford the bill, or disagreeing with the tax itself. For most people, the realistic path is reducing the balance, not erasing the interest.

How to Reduce What You Pay the IRS

The most direct lever is paying down the principal faster. Every extra dollar shrinks the balance that interest compounds on, so larger monthly payments or an occasional lump sum cut the total cost noticeably.

A few other moves:

• Get on a plan to halve the failure-to-pay penalty.
• Pursue penalty abatement to clear qualifying penalties.
• If you qualify, an Offer in Compromise settles the debt for less than the full amount and stops interest on the forgiven portion.
• If you truly can’t pay, Currently Not Collectible status pauses collection, though interest still accrues in the background.
• If your balance is too large to pay off before the CSED, a Partial Payment Installment Agreement (PPIA) lets you make reduced monthly payments based on what you can actually afford. The IRS reviews the amount periodically, and any remaining balance is written off once the collection statute expires.
• Keep the 10-year collection statute in mind: the IRS generally has 10 years from assessment to collect, after which the balance and its interest expire.

Stay Ahead of Growing IRS Debt

Interest runs every day until the balance is gone, so the cheapest decision is almost always to act sooner. Whether the right move is a payment plan, penalty relief, or a settlement depends on your numbers.

Precision Tax Relief offers a free, confidential consultation with a licensed tax professional. Contact us through the form at precisiontax.com to find out where you stand and what your options are. A licensed professional will get back to you within one business day.