Section 6621 of the Internal Revenue Code explains that IRS interest rates are based on a tandem of the federal short-term rate and an additional percentage defined by the federal statute. This means that every few months, taxpayers must try to anticipate how much they may owe and whether underpayments or overpayments fluctuate with prevailing economic conditions. The public has little time to acquiesce to IRS rate adjustments, so you need to know the following.
IRS Interest Rates: How Do They Work?
To start, overpayment and underpayment refer to what has been paid to the IRS before a particular due date:
- Overpayment Rate: This rate applies to individuals or entities who have overpaid their taxes. The IRS will pay interest on the overpayment from the date of the overpayment to the date of the refund.
- Underpayment Rate: Taxpayers who owe taxes will be required to pay interest from the due date of the return until the date the underpayment is settled in full.
For taxpayers other than corporations, both rates are the federal short-term rate plus three percentage points. With corporations, however, the rates are different and divided further.
Small businesses—between 100-1,500 employees or less than $40 million in revenue—will have an underpayment rate that is the federal short-term rate plus three percentage points, and the overpayment rate is the rate plus two percentage points. Large corporations are subject to the federal short-term rate plus five percentage points for underpayments, and overpayment is the rate plus one-half of a percentage point—on tax exceeding $10,000 per quarter.
Factors Influencing IRS Interest Rates
Federal short-term rates can be adjusted every fiscal quarter. The following are the beginning and end dates of the IRS’ calendar:
- January 1—March 31
- April 1—June 30
- July 1—September 30
- October 1—December 31
Taxpayers are not only affected by constant changes in rates but also the broader economic trends that influence them. For instance, inflation will cause the federal short-term rate to rise, impacting the tax planning for hundreds of millions of individuals and businesses. The most significant increase from the IRS in years just happened, and you should consult the Highland Tax Group to find out how it affects you.