Internal Revenue Code Section 6601: Rates, Compounding, and Relief

The IRS charges interest on any federal tax you didn’t pay by its original due date, and that interest compounds daily until the balance is gone. The rate resets every quarter: for the first quarter of 2026 the individual underpayment rate is 7 percent, and for the second quarter beginning April 1, 2026 it drops to 6 percent.¹ This isn’t a penalty and it isn’t discretionary. Under IRC Section 6601, interest runs automatically from the day the tax was due to the day it’s paid, and the IRS has no authority to waive it for good behavior or reasonable cause the way it can with some penalties.² What you can do is understand when the clock starts, how fast it runs, and the specific mechanisms that stop it.

When the Clock Starts

Interest begins accruing on the original due date of the return. Filing an extension changes nothing about this. Form 4868 buys you six more months to submit paperwork, but it does not extend the payment deadline, and the form itself warns that interest will be charged on any amount paid after the original due date “without regard to the extension.”³

The rule cuts the same way for audits. When an examination turns up additional tax owed for a return filed years ago, interest reaches back to that return’s original due date.⁴ By the time a long audit closes, accumulated interest can rival the tax adjustment itself.

How the Rate Is Set

The underpayment rate isn’t fixed. Under IRC Section 6621, the IRS recalculates it every calendar quarter by taking the federal short-term rate and adding three percentage points.⁵ Because the federal short-term rate tracks short-term Treasury yields, the underpayment rate moves with broader interest conditions.

A steeper rate applies to large corporate underpayments. When a C corporation owes more than $100,000 in unpaid tax for a given period, the rate is the federal short-term rate plus five points instead of three.⁵ That extra two points adds up quickly on six- and seven-figure balances.

Daily Compounding

Interest under IRC Section 6622 compounds daily. The IRS divides the annual rate by 365 (or 366 in a leap year) and applies that daily rate to the outstanding balance, including interest that has already accrued but hasn’t been paid.⁶ So a $10,000 balance at 7 percent doesn’t add exactly $700 over a year. Each day’s interest folds into the next day’s calculation, and the gap widens the longer the balance sits.

One narrow exception: daily compounding doesn’t apply to the estimated-tax penalty computed under Sections 6654 and 6655, which uses a simpler method.⁶

Ways to Stop or Reduce Interest

Because Section 6601 interest is statutory and non-discretionary, the IRS can’t decide to forgive it. But the clock can be stopped, and specific rules can either pause it or knock out accrued amounts.

Pay in Full

The most direct route is payment. Interest runs “to the date paid,” so every day matters.² If you’re contesting an adjustment but expect to lose, paying the disputed amount now and fighting for a refund later is usually cheaper than letting interest compound while the argument plays out.

The 21-Day Notice Window

When the IRS sends a notice and demand for payment, you get a short grace period. Pay within 21 calendar days of the notice date (10 business days if the amount on the notice is $100,000 or more), and no interest accrues on that amount between the notice and your payment.² Interest that already ran before the notice still stands, but paying inside that window keeps more from stacking on top.

Waiver of Restrictions on Assessment

If you agree with a proposed deficiency, you can file a waiver of restrictions on assessment (Form 870 is the common version). Once you file it, the IRS has 30 days to send a notice and demand for payment. If it misses that window, interest is suspended starting on the 31st day after the waiver was filed and stays suspended until the notice finally arrives.⁷ After you’ve conceded the liability, further delay is on the government.

Overpayment Credits

When the IRS applies an overpayment from one year against an underpayment in another, no interest is charged on the underpayment for any period during which the overpayment itself would have earned interest as a refund.² The interest cancels out for the overlapping period, because the government already had the money.

Deposits to Suspend Interest on a Disputed Amount

If you’re facing a potential deficiency but don’t want to concede it, IRC Section 6603 lets you send in a cash deposit that stops interest without counting as a payment. If the IRS ultimately determines you owe the tax, the deposit is applied to the liability and treated as having been paid on the deposit date, wiping out interest for that period. If the dispute breaks your way, you can request the deposit back in writing.⁸

The paperwork matters. Your remittance must be accompanied by a written statement designating it as a Section 6603 deposit, identifying the type of tax, the tax year, and the amount of “disputable tax.”⁹ Without the designation, the IRS treats the money as a payment and applies it to your oldest liability, which forfeits your ability to pull it back.

There’s a tradeoff. If the deposit comes back to you because you didn’t owe the tax, it earns interest at only the federal short-term rate, without the additional three points that apply to ordinary refund interest.⁸ You’re effectively lending the government money below market rates in exchange for stopping the underpayment clock.

Abatement for IRS Errors or Delays

Section 6601 interest isn’t discretionary, but a separate provision, IRC Section 6404(e), lets the IRS abate interest that piled up because of an unreasonable error or delay by one of its own employees.¹⁰ The error has to involve a “ministerial or managerial act”: a procedural or mechanical step like transferring a file or mailing a notice after all reviews are done, or an administrative decision like reassigning staff. Judgment calls, like the IRS deciding to prioritize another case, don’t count.¹¹

Two limits apply. No significant part of the delay can be your fault, and abatement only reaches interest that accrued after the IRS first contacted you in writing about the deficiency.¹⁰ Interest from before that first contact stays on the books even if the IRS caused the entire delay. Requests are made on Form 843, checking the box for interest abatement under Section 6404(e)(1).¹²

The Automatic 36-Month Suspension

Individual taxpayers get a second, automatic protection under IRC Section 6404(g). If you filed your return on time (extensions included) and the IRS doesn’t send a notice specifically identifying the liability and its basis within 36 months of the later of your filing date or the unextended due date, interest is suspended for the period after that 36-month mark until 21 days after the notice finally arrives.¹⁰ You don’t have to file anything to claim it.

The protection has real limits. It doesn’t apply to tax you reported on the return but didn’t pay, and it doesn’t cover cases involving fraud, criminal penalties, gross misstatements, or certain reportable and listed transactions.¹⁰ It also resets whenever you send the IRS signed written documents showing additional tax owed; the 36-month clock restarts from the date of the last document. For a straightforward audit that drags for years, though, the suspension can eliminate a meaningful chunk of interest.

Installment Agreements Don’t Stop Interest

A payment plan doesn’t freeze the clock. Interest and penalties keep accruing on the unpaid balance while you make your monthly installments.¹³ What an installment agreement buys you is protection from levies and other enforced collection, not a lower carrying cost. If you can borrow at a rate below the IRS underpayment rate and pay the balance off in one shot, you’ll come out ahead.

Interest on Penalties Follows a Different Timeline

Interest also applies to most penalties and additions to tax, but the start date is different. Interest on a penalty generally begins from the date the IRS issues a notice and demand for payment, and it only attaches if you don’t pay within 21 calendar days of that notice (10 business days if the amount on the notice is $100,000 or more).² Pay inside that window and no interest attaches to the penalty at all.¹⁴ So the underlying tax and its associated penalty can have very different interest start dates: the tax accrues from the original return due date, while a late-filing or accuracy penalty may not start accruing interest until the IRS sends the bill years later.

1
Internal Revenue Service. Internal Revenue Bulletin No. 2026-8
2
Office of the Law Revision Counsel. 26 USC 6601 – Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax
3
Internal Revenue Service. Form 4868 – Application for Automatic Extension of Time to File U.S. Individual Income Tax Return
4
Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
5
Office of the Law Revision Counsel. 26 U.S. Code 6621 – Determination of Rate of Interest
6
Office of the Law Revision Counsel. 26 USC 6622 – Interest Compounded Daily
7
Internal Revenue Service. Interest Suspensions and Form 906 Closing Agreements
8
Office of the Law Revision Counsel. 26 U.S. Code 6603 – Deposits Made to Suspend Running of Interest on Potential Underpayments, Etc.
9
Internal Revenue Service. Revenue Procedure 2005-18
10
Office of the Law Revision Counsel. 26 USC 6404 – Abatements
11
Internal Revenue Service. IRM 20.2.7 – Abatement and Suspension of Underpayment Interest
12
Internal Revenue Service. Instructions for Form 843, Claim for Refund and Request for Abatement
13
Internal Revenue Service. Payment Plans; Installment Agreements
14
Internal Revenue Service. Program Manager Technical Advice 2020-07