There are occasions when taxes are paid late and the IRS computes and interest amount on the late payment. We are often asked how the IRS computes interest.
As reported by Accounting Today, for the calendar quarter starting Jan. 1st, 2023, the IRS has just announced that for individuals, the rate for underpayments will by 7% per year, compounded daily, up from 6% for the quarter that started Oct 1.
This rise in rates coincides with higher rates in general and record high inflation. This rate is also in effect when the IRS refunds a taxpayer for an overpayment.
Other rate hikes announced by the IRS, include:
- 6% for corporations;
- 4.5 % for the portion of a corporate overpayment exceeding $10,000;
- 9% for large corporate underpayments.
Under the Tax Code, the IRS sets interest rates on a quarterly basis, and the rates are based on the federal short-term rate. For taxpayers, aside from corporations, the overpayment and underpayment rate amounts to a federal short-term rate plus 3 percentage points.
For corporations, the underpayment rate is the federal short-term rate plus 3 percentage points, while the overpayment rate is the federal short-term rate plus 2 percentage points.
The rate for large corporate underpayments is the federal short-term rate plus another 5 percentage points. The rate on the part of a corporate overpayment of tax over $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. For any questions or clarifications, please reach out to your LMC professional.
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