The Internal Revenue Service announced updated interest rates applicable to underpayments and overpayments of federal tax for the period beginning July 1, 2026. These rates, detailed in a May 2026 revenue ruling, also affect the calculation of the underpayment of estimated tax penalty under IRC Section 6654. Parallel adjustments have been issued by the California Franchise Tax Board. This publication reflects tax law and regulations applicable as of May 2026 and is subject to change without notice.
This article examines the IRS-announced underpayment and overpayment interest rates effective for the third quarter of 2026, the corresponding California FTB rates, the impact on estimated tax penalty calculations, and compliance considerations for both federal and state returns.
Federal Interest Rates Effective July 1, 2026
The IRS quarterly interest rates are determined under IRC Section 6621 (Rev. Rul. 2026-12) (accessed May 25, 2026). For July 1, 2026 – September 30, 2026:
| Rate Type | Annual Rate |
|---|---|
| Underpayment (most individuals, estates, and trusts) | 6% |
| Large corporate underpayment (LCU) | 8% |
| Overpayment (most taxpayers) | 5% |
| Overpayment (corporations) | 4% |
| Overpayment (large corporations) | 3.5% |
California Franchise Tax Board Interest Rates
For July 1, 2026 – September 30, 2026, the FTB rates are:
| Rate Type | Annual Rate |
|---|---|
| Underpayment (personal income and corporation tax) | 7% |
| Overpayment (personal income tax) | 6% |
| Overpayment (corporation tax) | 5% |
California does not conform to all federal estimated tax penalty relief provisions. Taxpayers with adjusted gross income of $1,000,000 or more cannot use the prior-year safe harbor and must pay 90% of the current year's tax liability to avoid the state underpayment penalty.
Interest on underpayments and the related estimated tax penalties accrue daily from the due date of the return (without extensions) until the balance is paid in full. The new rates apply to the portion of any underpayment that remains unpaid after June 30, 2026. Taxpayers who have received IRS or FTB notices of underpayment should verify the applicable rate on their specific balance.
Impact on Estimated Tax Penalty Calculations
The federal underpayment of estimated tax penalty is calculated using the interest rate in effect for each installment period. Safe harbor rules (100% of prior year tax or 90%/110% of current year tax) continue to protect most taxpayers from penalties, subject to the California $1,000,000 AGI limitation. Taxpayers who underpay in any quarter may owe both interest and the Section 6654/6655 penalty, even if the full year tax liability is paid by the filing deadline.
Compliance Resources and Tools
Official IRS forms and instructions, including Form 1040-ES, Form 2210, and Publication 505 (all accessed May 25, 2026), are available on IRS.gov.
- The IRS underpayment interest rate for most taxpayers is 6% for July 1–September 30, 2026; the large corporate underpayment rate is 8%.
- California FTB underpayment interest rate is 7% for the same period.
- These rates directly affect the calculation of federal and state estimated tax penalties under IRC Section 6654 and corresponding California rules.
- Taxpayers with AGI of $1,000,000 or more in California cannot rely on the prior-year safe harbor and must pay 90% of the current year's tax to avoid penalties.
- Interest accrues daily on unpaid balances; timely quarterly estimated tax payments remain the primary method of avoiding penalties and interest.
- Official IRS and FTB rate announcements are issued quarterly and should be monitored for subsequent adjustments.
References
- Internal Revenue Service. (2026). Rev. Rul. 2026-12: Interest Rates for Q3 2026. IRS.gov. Accessed May 25, 2026. https://www.irs.gov/irb/2026-22_IRB#RR-2026-12.
- Internal Revenue Service. (2026). Publication 505: Tax Withholding and Estimated Tax. IRS.gov. Accessed May 25, 2026. https://www.irs.gov/publications/p505.
- Internal Revenue Service. (2026). Form 2210: Underpayment of Estimated Tax. IRS.gov. Accessed May 25, 2026. https://www.irs.gov/forms-pubs/about-form-2210.
- Franchise Tax Board. (2026). Interest and Penalty Rates – FTB Notice 2026-03. FTB.ca.gov. Accessed May 25, 2026. https://www.ftb.ca.gov/about-ftb/newsroom/interest-and-penalty-rates/index.html.
- Internal Revenue Service. (2026). About Form 1040-ES. IRS.gov. Accessed May 25, 2026. https://www.irs.gov/forms-pubs/about-form-1040-es.
The information contained in this publication is provided for educational and general informational purposes only. It does not constitute tax advice, accounting advice, legal advice, or any other form of professional advice and does not create a client-professional relationship.
The content reflects tax law and regulations applicable on the date of publication only and is subject to change without notice. Examples and illustrations are hypothetical and do not represent any specific taxpayer situation.
No reader should act or refrain from acting on the basis of this publication without first obtaining specific written advice from a licensed CPA based on the reader's individual facts and circumstances.
Any federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
Parsi Team Specific Notice: This publication was prepared by non-licensed content personnel under the direct supervision and final approval of a licensed CPA. The reviewing CPA assumes professional responsibility for the technical accuracy and compliance of the content.