Tax Planning in 2025: The Role of Unchanged IRS Interest Rates

The IRS announced that it will keep its interest rates unchanged for the third quarter of 2025. This move affects both individuals and corporations that either owe taxes or have overpaid their tax obligations. While interest rates may not be the first thing taxpayers think about when planning their finances, understanding how they are set — and knowing why they matter — can play a key role in sound tax planning. 

Importance of IRS interest rates

When you overpay your taxes, the IRS pays you interest; when you underpay, you owe the IRS interest. Each quarter, the IRS sets new interest rates based on the federal short-term rate, established during a specific month prior to the quarter in question. For the third quarter of 2025, that determination was made in April. While the IRS has opted to leave rates unchanged for Q3, taxpayers should note that rates can move from quarter to quarter if the federal short-term rate experiences significant shifts. Another aspect of IRS interest rates is that they are compounded daily. This might sound like a small detail, but daily compounding leads to slight increases over time compared to monthly or annual calculations. Anyone with a tax underpayment or overpayment that continues beyond the third quarter will see that interest accrue each day.

Q3 rates

For the third quarter of 2025, rates for individual taxpayers remain at 7% annually, compounded daily, for both overpayments and underpayments. Corporate taxpayers who have overpaid can expect a 6% annual rate on their general overpayments. If a portion of the overpayment exceeds $10,000, the rate drops to 4.5%. Most corporate underpayments bear a 7% interest rate. However, large corporate underpayments (generally over $100,000) incur a 9% rate for the portion of the underpayment above $100,000. 

Best practices and recommendations

A thorough review of your tax liabilities, especially as the year progresses, helps prevent accidental underpayments that might trigger higher interest rates or penalties. Individuals and organizations should also consider collaborating with tax professionals who can help navigate the nuances of overpayments, underpayments, and any related rate changes. 

One of the best ways to avoid confusion is to maintain strong bookkeeping practices, which streamline the process of accurately calculating and reviewing balances. Keeping an eye on future IRS announcements in the months ahead is also essential, as rates could change in subsequent quarters.