IRS Announces Tax Interest Rate Drop for Some

The IRS just announced its interest rates for 2025, and Americans can expect lower rates for overpayments and underpayments.
Beginning January 1, the rates will be set at 7 percent annually, compounded daily, representing a 1 percent cut and the first interest rate decrease the IRS has announced since 2020.
For corporations facing overpayments, the interest rate shifts to 6 percent, while they will face 4.5 percent for the portion of a corporate overpayment exceeding $10,000. Large corporate underpayments will see a 9 percent interest rate.
“These rates are based on the federal short-term rate, plus a few extra points depending on whether you’re an individual or a business,” Alex Beene, financial literacy instructor for the University of Tennessee at Martin, told Newsweek. “This is welcome news if you’re in one of these categories, as they are less than in past quarters.”
Underpayments generally are more problematic for taxpayers, as you’ll face a penalty if you didn’t pay all of your estimated income taxes or paid those taxes late.
Sometimes an underpayment occurs when your employer didn’t withhold enough from your paycheck to cover your full tax liability. Independent contractors can also be penalized if they miss or underpay a quarterly estimated tax payment.
The penalty only applies to taxpayers who owe more than $1,000, and you’ll typically receive an IRS notice in the mail.
IRS overpayments happen when taxpayers or businesses paid an excessive amount of tax. The IRS will correct these overpayments with a refund, which is also where the interest rate plays a role.
Typically, refunds are processed within three weeks. For individuals, the new interest rates mean many might face lower penalties for late tax payments and reduced interest on delayed tax refunds. Businesses will see lower costs on underpayment penalties and lower potential earnings from overpayments.
Finance experts recommend both individuals and businesses stay informed about future rate changes and consider consulting a tax professional. The rates are set quarterly and updated based on economic conditions, so taxpayers should remain adaptable depending on how the economy shifts.
Michael Ryan, finance expert and founder of michaelryanmoney.com, said the IRS’ first- quarter 2025 interest rates ultimately reflect a stabilizing economy.
“These adjustments mirror declining inflation and shifting financial markets, potentially offering slight financial relief for taxpayers and businesses,” Ryan told Newsweek.
“While the changes may seem minor, they can significantly impact those managing substantial tax obligations.”
Now that the Fed is lowering the federal funds rate, other rates, including those of the IRS, are also heading downward, according to NerdWallet’s lead investing writer, Sam Taube.
“If the Fed continues to cut rates in the coming months, more of these IRS interest rate cuts may follow,” Taube told Newsweek. “However, it’s worth noting that these rates only apply to underpayers and over-payers—they don’t affect taxpayers who pay the correct amount they owe, on time.”