The amount of interest required to be paid for underpayment of tax is compounded daily. In order to calculate compound interest, you divide the Code Sec. 6621 interest rate by the number of days in the year, 365 (or 366 in a leap year, such as 2008) and then compound the daily interest rate each day.

Daily compounding

The IRS publishes tables for use in computing daily compound interest. The tables consist of daily compounding interest factors for leap years and non leap-years. The Code Sec. 6621 interest rates, also known as the federal short term rates, are also incorporated in such tables.

The federal short term rates for underpayment of tax applicable to individuals and corporations are determined by the federal government on a quarterly basis. The rates can be found in the Internal Revenue Bulletin.

Interest rates

From January 1, 2008 - March 31, 2008, the interest rates for underpayments are nine percent for large corporate underpayments and seven percent for all other underpayments. From January 1, 2007 - December 31, 2007, the interest rates for underpayments were ten percent for large corporate underpayments and eight percent for all other underpayments. The rates are subject to change each quarter.