The Internal Revenue Service (IRS) has announced interest rates for tax underpayments and overpayments for the fourth quarter of 2026, maintaining them at 7 percent for individual taxpayers.
When a taxpayer does not pay their taxes, penalties, and other charges on time, the IRS charges underpayment interest. Conversely, if a taxpayer were to pay more taxes than what is actually owed, the agency pays interest on the overpayment. Interest rates on such payments are determined on a quarterly basis. The 7 percent interest rate for overpayments and underpayments comes into effect on Oct. 1, the IRS said in an Aug. 21 statement.
For corporations, the overpayment interest rate is set at 6 percent. However, for overpayments exceeding $10,000, the rate will be lower at 4.5 percent for the portion exceeding $10,000. The underpayment rate is set at 7 percent, the same as for individual taxpayers. For large underpayments by corporations, the rate is set at 9 percent. All rates are unchanged from the third quarter.
According to an April 26 update from the IRS, interest on underpayments is charged starting on the due date of the owed amount. The interest will continue to accrue until the balance is paid in full.
Interest on overpayments is calculated after taking into account factors such as the tax filing due date, payment dates, and when the agency receives the tax return in a format it can process.
Taxpayers can file claims when they feel that overpayment interest is insufficient.
The interest rates are announced based on the federal short-term rate for July, which was determined to be 4 percent.
For taxpayers other than corporations, the overpayment and underpayment interest rate is the federal short-term rate plus 3 percentage points, according to the IRS.
For corporations, the underpayment rate is the federal short-term rate plus 3 percentage points. For overpayments, it is the federal rate plus 2 percent, except for amounts exceeding $10,000, in which case only 0.5 percentage point is added.
Penalty Relief
The IRS also recently introduced a new automatic penalty relief process for taxpayers, according to an Aug. 10 statement from the agency.
The new Automatic Exemption from Penalty (AEP) will be available to taxpayers who have filed and paid their taxes on time for the past three years or 12 consecutive quarters, the agency said. For eligible taxpayers, they will automatically get relief from common penalties, such as failure to pay or file on time.
Once the IRS applies the AEP to eligible tax returns, the relevant taxpayers will be sent a confirmation notice, according to the agency.
Those who do not qualify for AEP can request penalty relief under “reasonable cause,” which is determined by the IRS on a case-by-case basis.
During the transition period, some taxpayers who qualify for AEP may still receive a penalty notice for 2025 and 2026 returns, the IRS said. In such cases, taxpayers can get in touch with the IRS and request FTA relief.
“Automatic Exemption from Penalty reflects the IRS’ commitment to making the payment of taxes owed simpler and more consistent,” IRS CEO Frank J. Bisignano said in the statement.
“By automatically applying penalty relief, the IRS recognizes that taxpayers who historically pay on time should not have to make a formal request for relief that is routinely granted.”
