How to Calculate Compound Daily Interest of Tax Underpayment

If you do not pay the full amount of taxes you owe by April 15, the Internal Revenue Service will assess interest on the underpayment balance, even if you filed for an extension to file your return. The IRS calculates underpayment interest by adding 3 percentage points to the current federal short-term rate, which changes quarterly. The interest is then compounded daily, which means it is assessed on the previous day's underpayment balance plus the interest.

Step 1

Get the federal short-term interest rate from the IRS website. Add an additional 3 percentage points to determine the total interest. As an example, if the current short-term interest rate is 0.30 percent, add 3 percentage points to get 3.30 percent total interest.

Step 2

Multiply the amount of the underpayment by the interest rate. Add the result to the underpayment balance to get the amount you owe for the current day. As an example, if your underpayment is $500 and the interest rate is 3.30 percent, the interest you owe is $16.50, and the total amount you owe is $516.50.

Step 3

Compound the daily interest by multiplying the amount you owe for the current day by the interest percentage and adding the result to the current daily balance. As an example, if your current daily balance is $516.50, the compounded interest is $17.04 and your new daily balance is $533.54.

About the Author

Lauren Treadwell studied finance at Western Governors University and is an associate of the National Association of Personal Financial Advisors. Treadwell provides content to a number of prominent organizations, including Wise Bread, FindLaw and Discover Financial. As a high school student, she offered financial literacy lessons to fellow students.

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