As the American economy continues to struggle and confront uncertainties in 2025, the Federal Reserve and the IRS are opting to go for stability in these trying times by leaving the key interest rates unchanged for the third quarter of the year. According to the official release of the IRS on May 12, 2025, from July 1, 2025, IRS interest rates for overpayment and underpayment by individual taxpayers will remain at 7%, while interest rates for corporate entities will remain at 6%.
In the same spirit, the Federal Reserve also chose to let its benchmark federal funds rate float between 4.25% and 4.5% for the third quarter in a row, thus again an embrace of stability. Such key financial decisions by both institutions reflect a wait-and-see approach in the face of ongoing inflationary pressures, tariff concerns, and other economic headwinds; more than 140 million Americans are expected to file their tax returns this financial year, with U.S. GDP forecast to register a paltry 1.7% growth.
IRS Interest Rates for Q3 2025: What Taxpayers Ought to Know
For the calendar quarter to begin on July 1, 2025, the Internal Revenue Service, commonly referred to as the IRS Audits, has officially released and established the following interest rates:
- 7% on excess payments (individuals)
- 6% on overpayments (companies)
- 4.5% corporate overpayment amount over $10,000
- 7% for underpayments (all taxpayers)
- 9% for large corporate underpayments
These rates are daily compounded and are set by the federal short-term rate with a margin, as outlined in the Internal Revenue Code. The IRS also recalculates these rates quarterly, but for Q3 2025, they are identical to the prior quarter.
How Interest Rates Charged by the IRS are Calculated and Determined
Let us understand how the interest rates charged by the IRS are calculated for different sectors:
- For individuals: Overpayment and underpayment percentages = Federal short-term rate + 3 percentage points.
- For corporations: Overpayment = Federal short-term rate + 2 points; Underpayment = Federal short-term rate + 3 points.
- Big business underpayments: Federal short-term rate + 5 points.
- Corporate excess payments greater than $10,000: Federal short-term rate + 0.5 points.
The rates so determined are based on the federal short-term rate, which has been particularly calculated in April of the year 2025. In addition, the rates shall be published and made available officially in the Internal Revenue Bulletin, which has been designated as 2025-23, on June 2, 2025.
Federal Reserve Holds Benchmark Rate Steady
The Federal Funds Rate has been held steady, notwithstanding the current uncertainty in the economic environment.
The United States Federal Reserve, which is the country's central banking system, has maintained its federal funds rate between 4.25% and 4.5% since December of the year 2024. This has continued to be the situation in its recent meetings that were conducted in March and May of the year 2025. The maintenance of the rates is the third quarter in succession when there have been no changes, as policymakers are observing closely and assessing the effects of newly imposed tariffs, the current inflation trends, and the general slowdown of the economy.
- Effective federal funds rate (May 2025): 4.33
- Prime loan rate: 7.5% (no change)
- Three-month Treasury yield: ~4.29%
Federal Reserve Chairman Jerome Powell has strongly reaffirmed the need to take a "wait-and-see" stance at present, citing heightened risks of further inflation and rising unemployment rates. The central bank is watching the effects of President Trump's trade policies on the economy closely and is prepared to make interest rate adjustments as required later in the year, if the current economic environment warrants.
Why is the Fed Pausing?
- Inflation: While inflation has eased, new tariffs would push core CPI inflation back to 3.5%–4% during the fourth quarter.
- Economic Growth: GDP growth is forecast at 1.7% in 2025, down from earlier projections.
- Labor Market: The labor market continues to produce a strong overall performance with its solid footing, but analysts are also expecting a recognizable easing in the months to come in some categories.
- Policy Perspective: The financial markets these days are speculating about whether announcements of interest rate cuts will be made for the latter half of 2025. But at the same time, it has to be noted that there is no urgency for the Federal Reserve to make such monetary policy changes now.
Economic and Financial Impacts of This Decision
Here are some of the major impacts of interest rates on businesses and economy:
For Taxpayers who pay taxes and for Businesses
- IRS Interest Rates: Unchanged rates translate to no increase in interest due on overdue tax payments or reduction in interest on overpayments for Q3 2025.
- Borrowing Costs: The Federal Reserve's steady and conservative stance offers a solid foundation for the cost of borrowing mortgages, commercial loans, and credit card spending. Yet, it is important to observe that the costs are still relatively higher than the costs of the last decade.
- Savings and Investments: Savers are still getting more bang for their buck on CDs and savings accounts, and investors are waiting for signs of imminent Federal Reserve action.
For the Broader Economy
- Inflation Risks: Placing new tariffs can potentially rekindle inflationary forces in the economy, which can be a major headache. Nevertheless, the Federal Reserve is now opting to hold back before altering any interest rates until more detailed data is available for examination.
- Growth Problems: As the rate of growth in GDP continues to decelerate and the specter of recession ever more hangs in the balance, the Federal Reserve is treading on a very fine tightrope in trying to balance its dual mandate of price stability and maintaining full employment in the labor force.
Looking Ahead: Will Rates Change in Late 2025?
Market strategists are expecting the Fed to begin easing policy with up to three rate cuts in the second half of the year, depending on inflation and growth figures. For the moment, the message is simple: both the Fed and the IRS are calling for stability as the U.S. economy faces a complex mix of threats and opportunities.
Related Resource
- Preparing for IRS Audits: How U.S. Businesses Can Benefit from Professional Bookkeepers
- IRS 2025 - New Rules for Multimillionaires’ Tax Audits
- IRS Modernization Halted: What it Means for 2025 Filers
For the third quarter of 2025, the IRS interest rates and the Federal Reserve are steady at current levels, a conservative move during uncertain economic times. Taxpayers, corporations, and investors can expect to budget for ongoing stability in borrowing and interest tied to taxes at least through September. With all things, keeping abreast of future releases and economic trends will be key to making intelligent financial choices for the months ahead.
