New IRS Rates Are Out: Why AFRs Matter

The IRS publishes applicable federal rates (AFRs) every month. You may have even seen them on the IRS website. Most recently, the IRS posted Revenue Ruling 2026-17, which notes that, for September 2026, the annual rates are 4.18% for short-term obligations, 4.49% for mid-term obligations, and 5.12% for long-term obligations.

But what exactly are AFRs—and when do they matter?

What Are AFRs?

AFRs aren’t your run-of-the-mill interest rates. They are rates prescribed by the IRS for certain federal tax purposes. They are based on market yields on outstanding U.S. government obligations and change monthly.

For tax purposes, AFRs are divided into three basic categories based on the term of the loan or debt:

• Short-term: three years or less
• Mid-term: more than three years and up to nine years
• Long-term: more than nine years

The IRS also publishes rates for semiannual, quarterly, and monthly compounding.

It’s tempting to think of the AFR as the interest rate you’re required to charge. But that’s not exactly right. It’s better to think of the AFR as a benchmark: it helps determine whether the interest rate you’ve chosen—or the lack of one—creates additional federal tax consequences.

Loans Between Family Members

Let’s say you want to help your daughter buy a house, so you loan her $200,000. You might be tempted to charge no interest, or you might decide that 1% sounds fair because, after all, she’s your daughter.

For tax purposes, however, simply calling a loan interest-free or low-interest doesn’t mean the IRS will ignore the interest that wasn’t charged.

Section 7872 of the tax code sets rules for certain below-market loans. When those rules apply, the IRS can impute interest, treating the transaction as if interest had been charged even though you, as the lender, didn’t actually collect it. That can result in taxable interest income to the lender (in this case, you). Depending on the circumstances, it may also be treated as a deemed transfer back to the borrower, potentially resulting in a deemed gift for federal gift-tax purposes.

There are exceptions and special rules for some below-market loans, including certain loans of $10,000 or less, so the result will depend on the facts.

Seller Financing and Installment Sales

AFRs can also matter when property is sold, and the seller agrees to accept payments over time.

Suppose you sell property for $500,000, with the buyer paying you over eight years. You might think you can simply divide the $500,000 into payments and call every dollar the purchase price. The tax rules don’t necessarily allow that.

Instead, depending on the transaction, if you haven’t charged enough interest, the tax law may use the AFR to treat part of the payments as unstated interest or original issue discount (OID) rather than purchase price. That matters because interest is generally taxed as ordinary income rather than as gain from the sale.

OID can also arise in other debt transactions. Generally, you can think of OID as the difference between what must ultimately be repaid on a loan or other debt and the amount originally advanced. Rather than recognizing all of that economic return when the debt is paid, the tax rules may require OID to be treated as interest and included in income over the life of the instrument.

It can become complicated quickly, but the basic rule is this: you can’t turn one thing into something else simply by changing the label.

Why Does the IRS Publish 110%, 120%, and 130% Rates?

The IRS also publishes rates based on 110%, 120%, 130%, and, for some mid-term purposes, 150% and 175% of the AFR. That’s because different provisions of the Tax Code call for rates calculated as a percentage of an AFR.

One of the best-known examples is section 7520. Section 7520 provides the rate used to determine the present value of certain annuities, life estates, terms of years, remainder interests, and reversionary interests. The rate is based on 120% of the federal mid-term rate, compounded annually, and rounded to the nearest 0.2%.

For September 2026, the Section 7520 rate is 5.4%.

That’s an important number for estate and gift tax planning, including the valuation of interests in certain trusts and other wealth-transfer strategies. Because the rate changes monthly, shifts in interest rates can make some planning techniques more—or less—attractive.

What Is the Adjusted AFR?

The IRS also publishes an adjusted AFR. Despite the name, it’s not an alternative rate that taxpayers can simply choose to use.

Adjusted AFRs are used for specific purposes, including certain rules involving tax-exempt obligations. Similarly, the adjusted federal long-term rate has specialized applications under section 382, which generally addresses the use of corporate tax attributes following certain ownership changes.

For September 2026, those annual rates are 3.16% for short-term obligations, 3.40% for mid-term obligations, and 3.88% for long-term obligations.

AFRs Are Not the Interest Rate on Your Tax Bill

One last note: AFRs are not the same interest rates the IRS uses when you owe the government money.

The IRS charges interest on tax underpayments and generally pays interest on tax overpayments. Those rates are determined under a different section of the Tax Code—section 6621—and are generally announced quarterly rather than monthly.

That means several different “IRS interest rates” can be in effect at exactly the same time (confusing, right?).

For September 2026, the annual short-term AFR is 4.18%, the mid-term AFR is 4.49%, and the long-term AFR is 5.12%. The Section 7520 rate is 5.4%. Meanwhile, the general IRS underpayment rate is 7% for the third quarter of 2026—and the IRS has already announced that it will remain at 7% for the fourth quarter.
They’re all used for different purposes.