How the IRS calculates interest

Filing a tax return on time and paying any taxes due allows you to avoid having to worry about paying any additional penalties and interest the IRS may charge.  However, every year there are taxpayers who find that they are unable to pay their tax obligations on time.  These taxpayers face paying not only significant penalties, but they also owe interest on the taxes that have not been paid.  So, just how much will a taxpayer owe? And how the IRS calculates interest?

The amount of total interest owed is based on if a taxpayer has filed their tax return. Individuals who have not filed their tax return and have a tax balance past the due date are charged a failure-to-pay (FTP) penalty in the amount of 0.5% per month. This penalty amount is compounded on a daily basis, meaning interest is charged daily based on the previous day’s new principal and interest. If the tax return remains unfiled, the interest rate can be increased to 1% per month within ten days of the IRS issuing an Intent to Levy.  If a taxpayer files their tax return on time, and agrees to enter into an installment agreement, the interest is lowered to .25% per month.  The total maximum amount of interest that can be charged is 25% of the unpaid tax at the due date of the tax return.

If a taxpayer has not filed their tax return and owes taxes, they are also subject to a failure-to-file (FTF) penalty.  This is 5% of the unpaid tax per month, or part of a month that a tax return is not filed, up to a total of five months. If the tax return is more than 60 days past due, the minimum penalty is the lessor of $135, or 100 percent of the tax owed.

In addition to paying interest, an underpayment interest charge of the federal short-term interest rate plus 3% is charged on the balance, which is compounded on a daily basis.  Corporations owe the same FTP penalty amount and underpayment interest charge; however, if they owe more than $100,000 dollars, they face an underpayment interest charge of the federal short-term interest rate plus 5%.  The current federal short-term interest rate rounded to the nearest whole rate is 0%, determined on quarterly basis.

If a taxpayer finds they are unable to pay their tax balance by the due date, it is important that they contact the IRS to discuss the options they have in order to reduce the amount of additional penalties or interest they may end up owing. Another option is to seek the assistance of a tax professional, such as a tax attorney, in order to discuss other options.  A tax attorney can be authorized to represent a taxpayer, and may contact the IRS on the taxpayer’s behalf in order to negotiate any past due filing or late tax payment issues.  In addition, they can often provide tax planning services in order to help avoid a situation where a taxpayer is unable to either file their tax return and/or pay any taxes owed on time.

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Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.