The IRS charges all taxpayers interest, called underpayment interest, when tax, penalties, additions to tax, or interest is not paid on time and before the due date. The underpayment interest applies even if you file for an extension.
If taxpayers end up paying more tax than is owed to the IRS, they received interest on the extra amount, called the overpayment amount.
The Internal Revenue Service (IRS) has announced that interest rates will rise for the period beginning January 1, 2023. Individuals will experience a 7% per year, compounded daily, overpayment/underpayment rate, an increase from the 6% of the current quarter.
Here is a list of the new rates from the IRS:
- 7% for overpayments by all taxpayers except corporations
- 6% for corporations
- 4.5% for corporate overpayments exceeding $10,000
- 7% for underpayments
- 9% for large corporate underpayments
The IRS Code stipulates that the rate of interest is reassessed every quarter. Taxpayers other than corporations will incur the federal short-term rate plus 3 percentage points for overpayments and underpayments.
Generally, the rate of interest for corporate underpayments is the federal short-term rate plus three percentage points, while the rate for corporate overpayments is the federal short-term rate plus two percentage points.
Additionally, on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period, the rate is the federal short-term rate plus one-half (0.5) of a percentage point.
For large corporate underpayments, the rate is the federal short-term rate plus five percentage points.
These interest rates, based on the federal short-term rate were determined during October 2022 and are detailed in Revenue Ruling 2022-23PDF.
Featured Image Credit: Pexels.