newbie tool diamter compensation problem

As ArcEye showed it is a good idea to start the program with a preamble that puts the machine in a know state...

What position is the machine in when you start the program?

perhaps try changing this...

%
(Header)
(Generated by gcodetools from Inkscape.)
(Using default header. To add your own header create file "header" in the output dir.)
M3
(Header end.)
G21 (All units in mm)

(Start cutting path id: rect3473)
(Change tool to Default tool)

G00 Z5.000000
G42 D1
G00 X0.074466 Y12.625551 (comp intro line)

....rest of program

To

%
(Header)
(Generated by gcodetools from Inkscape.)
(Using default header. To add your own header create file "header" in the output dir.)
M3
(Header end.)
G21 (All units in mm)

(Start cutting path id: rect3473)
(Change tool to Default tool)

G00 Z5.000000
G42 D1

G00 X-2 Y10

G00 X0.074466 Y12.625551 (comp intro line)

...rest of program

Are you using backlash compensation?

Rick G

Thanks Rick G I had tried adding in another move like that already but it didn't help. I start the program with the machine in the home (0,0,0) position.

The overshoot always happens on the last cut / edge of the square. However, if I continue on to re-trace half of the fist cut (first edge of the square) then the machine won't overshoot because it follows a previous cut

G01 X0.074466 Y0.074480 Z-0.125000 (this line overshoots position unless I add the next line)
G01 X12.625534 Y6 Z-0.125000 (Y6 is about half the line already cut on the first pass)

I found an example of cutting out the inside profile of a square with tool comp and they seem to arc in and out of the cut. I'm not sure why this is needed but I guess its what i have to do. See Figure 5 here:
linuxcnc.org/docs/html/gcode/tool_compensation.html#_examples