The Internal Revenue Service (IRS) has announced that federal interest rates on tax overpayments and underpayments will remain unchanged for the fourth quarter of 2025, effective from October 1, 2025. Individual taxpayers will continue to see an annual interest rate of 7% for both overpayments and underpayments, compounded daily.
In addition to the rates for individual taxpayers, the IRS has provided a comprehensive breakdown for corporations and other types of taxpayers. For corporate overpayments, the interest rate will be set at 6%, while the portion of a corporate overpayment exceeding $10,000 will incur a rate of 4.5%. Underpayments by individuals and most taxpayers will also attract the 7% rate, but large corporations facing underpayments will see a significantly higher rate of 9%.
Understanding IRS Interest Rate Determination
The IRS determines interest rates quarterly, as stipulated in the Internal Revenue Code. The rates are based on the federal short-term rate established by the U.S. Treasury. For noncorporate taxpayers, both overpayment and underpayment rates are calculated using the federal short-term rate plus 3 percentage points. In contrast, corporate rates differ slightly; the overpayment rate is based on the federal short-term rate plus 2 percentage points, while the standard underpayment rate is calculated using the federal short-term rate plus 3 percentage points.
For large corporate underpayments, a higher rate applies, specifically the federal short-term rate plus 5 percentage points. The IRS has confirmed that these rates were computed based on the federal short-term rate determined in July 2025. Detailed information regarding these rates will be published in Revenue Ruling 2025-18, set to appear in Internal Revenue Bulletin 2025-37 on September 8, 2025.
By maintaining the current rates, the IRS aims to provide consistency for taxpayers as they approach the final quarter of the year. This stability offers individuals and businesses predictable benchmarks for calculating interest on both overpayments and outstanding tax liabilities.
