Thanks to the coronavirus pandemic, the cost of almost everything has gone up, including hiking equipment (don’t ask me how I know). With higher prices come higher interest rates, including interest paid to the IRS for penalties and tax underpayments. IRS interest rates are now at relatively high levels, but they appear to have reached their peak. The best way to deal with IRS interest charges is to avoid them as much as possible. Highland Tax Resolution can help with that and give you additional advice on preventing them in the future.
How the IRS Calculates Interest Rates
IRS interest rates are based on the federal short-term rate plus three percentage points for individual taxpayers. The federal short-term tax rate is set quarterly by the Federal Reserve.
Current IRS Interest Rates
For the first quarter of 2024, the IRS is charging the following interest rates:
- For individual taxpayers, the rate is 8 percent for pending debt or underpayments.
- For corporate taxpayers, the rate is 7 percent.
- For large corporations, the rate for underpayments is 10 percent.
Could Interest Rates Change Later?
Kiplinger predicts the Federal Reserve will modestly cut the short-term interest rate throughout 2024 and 2025. Forbes notes that the short-term rate will likely end in 2024 between 4 and 5 percent. While the Federal Reserve hinted that it expects to make rate cuts in 2024, it has taken no formal action. Reliable sources agree that the rates won’t return to “near zero” (resulting in a 3 percent federal tax interest rate) any time in the near future. The odds are that high interest rates will remain in place throughout 2024.
How to Minimize Interest Paid to the IRS
To avoid paying interest to the IRS (or reduce any interest you have to pay), you have several options:
- Pay tax debt on time if you’re able.
- Negotiate an installment agreement.
- Avoid underpayments of quarterly taxes.
- Negotiate a reduction in penalties.
Some of these you can do on your own, while more complex tax issues might require the help of a tax professional.
Using a Payment Plan to Reduce Interest Charges
If you’re preparing to file your tax return but can’t pay or have other outstanding tax debt, an installment agreement or payment plan with the IRS may be the answer. The IRS has several options for short- and long-term extensions of payment of taxes.
Short-Term Payment Plans
- For Agreements Shorter than 180 days
- Informal agreement.
- No set-up fee.
- Interest and penalties continue to accrue.
Long-Term Payment Plans
- For extensions longer than 180 days.
- Formal agreement.
- A set-up fee of $31- $225 (which may be lowered for low-income taxpayers).
- Interest and penalties continue to accrue and can be substantial.
Both types of payment plans can accrue interest. However, the interest you pay with a payment plan will be less because you’re reducing your tax debt with each monthly payment. The smaller your tax balance, the less interest you have to pay.
Other Tax Relief Options
For many taxpayers, payment of the total amount of a tax debt isn’t possible, even with the extensions of time provided by installment agreements. These taxpayers may make an Offer in Compromise (OIC), an offer to settle a tax debt for less than the amount owed.
The IRS is also waiving penalties and fees for qualified individuals and corporations who filed but couldn’t pay taxes in the 2020 and 2021 tax years. This is significant relief as the IRS expects to waive “billions” in penalties and fees. Penalties and fees are substantial for many taxpayers, and this program will be a welcome relief.
How Highland Tax Resolution Can Help
Tax interest rates remain high for individual and corporate taxpayers. You can face underpayment penalties and interest if you don’t fully pay your taxes when due. Highland Tax Resolution can help prevent or reduce the interest you have to pay the IRS for underpaying taxes.