Carrying a balance with the IRS is about to cost more. Beginning July 1, the interest rate on unpaid individual taxes rises to 7 percent a year, compounded daily, up from 6 percent this quarter. The same 7 percent will apply to money the IRS owes you on overpayments.
The change, announced by the agency in mid-May, matters to anyone paying off a tax bill on an installment plan, anyone who filed in April without paying in full, and self-employed people whose quarterly estimated payments run light. Here are the new numbers, how the IRS arrives at them, and what to do before the higher rate starts running.
The new rates, line by line
For the calendar quarter beginning July 1, 2026, the IRS quarterly rate table shows 7 percent for underpayments by individuals and businesses alike, and 7 percent for overpayments to non-corporate taxpayers, meaning ordinary filers. Corporations collect 6 percent on overpayments, dropping to 4.5 percent on the portion of a corporate overpayment above $10,000, while large corporate underpayments are charged 9 percent.
Every one of those figures is a full percentage point above the rates in effect for April through June. The formal announcement appears in Internal Revenue Bulletin 2026-22. Filers with long memories will note the round trip: rates stood at 7 percent in the first quarter of this year, eased to 6 percent in the second, and now return to 7.
Where the number comes from
There is no discretion in the figure. By law, the rate for individuals equals the federal short-term rate, rounded to the nearest full percent, plus 3 percentage points, recalculated each quarter. The short-term rate determined in April came to 4 percent, so the third-quarter rate is 7. When market interest rates rise, the IRS rate follows within a quarter or two, which is exactly what happened here.
Two mechanics amplify the headline number. Interest compounds daily, so you pay interest on yesterday’s interest, making the effective annual cost slightly higher than 7 percent. And interest accrues automatically from the original due date of the tax until the balance reaches zero. Unlike penalties, interest generally cannot be waived for reasonable cause; as long as the underlying tax is owed, the meter runs.
If you owe: interest stacks on top of penalties
Interest is only one layer of the cost of an unpaid balance. A taxpayer who filed on time but has not paid also owes the failure-to-pay penalty, normally 0.5 percent of the unpaid tax per month, on top of the interest charge, as the IRS lays out on its penalties page. Together, penalties plus 7 percent daily-compounded interest mean a lingering balance grows faster than many credit union loan rates.
The practical takeaways are straightforward. Pay what you can now, before July 1, because every dollar paid stops accruing at the new higher rate. If you cannot pay in full, an installment agreement is worth setting up: the failure-to-pay penalty rate is cut in half, to 0.25 percent per month, while an agreement is in effect, though interest itself keeps running. And if the choice is between the IRS meter and a home equity line or other loan at a lower rate, the arithmetic now leans a bit further toward paying the IRS off first.
The estimated-tax angle, with a deadline a week away
The 7 percent rate also drives the penalty for underpaying estimated taxes, which is calculated like interest on the shortfall for each day it exists. Self-employed workers, retirees with investment income, landlords, and gig workers who pay quarterly should note that the second estimated payment for 2026 is due June 15, a week from the publication of this article. Paying that installment on time and in the right amount is now worth a little more than it was last quarter. The IRS explains the safe-harbor rules, which generally protect you if you pay in 90 percent of this year’s tax or 100 to 110 percent of last year’s, on its estimated taxes page.
If the IRS owes you
The same 7 percent works in your favor when the government holds your money too long. The IRS generally must pay interest on a refund it issues more than 45 days after the filing deadline or after receiving your return, whichever is later. Refund interest sounds pleasant, but remember that it is taxable income in the year you receive it, unlike the refund itself.
There is a planning point hiding here as well. Some taxpayers deliberately leave large refunds with the IRS as a kind of forced savings. At 7 percent, that still is not a good deal, because the interest only starts after the 45-day window and only in limited situations. Money you over-withhold all year earns nothing for most of that time. Adjusting your withholding to land near zero remains the better play.
What to watch next quarter
These rates reset every three months, and the fourth-quarter figures will be announced toward the end of the summer based on the federal short-term rate this month and next. If market rates hold, the 7 percent rate likely persists; if they fall, the IRS rate will follow with a lag. Either way, the rule of thumb does not change: the IRS is an expensive lender and a mediocre bank. Owe them as briefly as possible, and do not lend them more than you must.
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