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03/14/2018

IRS Raises Its Interest Rates on Unpaid Overpaid Taxes

The IRS has announced the interest rates it charges on unpaid, overpaid and underpaid income taxes are going up.  IRS interest rates are determined on a quarterly basis and are generally based on the federal short-term rate plus certain percentage points. IRS Interest Rates Going Up

Beginning April 1, 2018, the new interest rate the IRS will charge for underpayment of taxes will be 5% (up from 4.18% in 2017) for individual taxpayers and 7% for large corporate taxpayers.  The interest rate is charged on any unpaid tax from the original due date of the return until the date of payment.  It is compounded daily.

Also this April, the rate for overpayment of taxes will increase to 5% for individuals and 4% in the case of a corporation plus 2.5% for the portion of a corporate overpayment that exceeds $10,000.  It may be hard to imagine someone or a company paying more taxes than they owe, but this happens most often with individuals who must pay quarterly estimated taxes based on a guess of what their income may be.  Overpayments may also occur with  businesses that withhold the incorrect amount of income tax based on unrealized predictions.

If you owe tax and don’t file on time, penalties are assessed in addition to the interest on unpaid tax. The late-filing penalty is usually 5% of the tax owed for each month the return is late up to five months or no more than a total of 25% of the tax owed. If you file more than 60 days after the due date, the minimum penalty you face is $205 or 100% of your unpaid tax, whichever is less.

If you file on time, pay some of the tax you owe, but don’t pay all the tax that is owed, then you’ll generally have to pay a late-payment penalty of .5% (one-half of one percent) of the outstanding balance of tax you owe per month, until the tax is paid in full.  So, there is a benefit to paying as much as you can, if not all you owe, when you file your tax return.

If there are months in which both the late-filing and late-payment penalties apply, then the 0.5% late-payment penalty may be waived.

Interest rates on under- and over-paid taxes have ranged from a high of 9% in the 1995 and 2001 tax years, to a low of 3% from 2011 to 2016 tax years.

If you don’t pay the tax you owe when you file your tax return, you’ll receive a notice from the IRS in the form of a letter, basically a bill, for the amount you owe. The bill is the official start of the collection process.  It will include the amount of the tax, plus any penalties and interest accrued on your unpaid balance from the date the tax was due.

The IRS has the right to levy (seize) assets such as wages, bank accounts, social security benefits, and retirement income. The IRS may also seize your property (including your car, boat, or real estate) and sell the property to satisfy an outstanding tax debt. In addition, any future federal or state income tax refunds that you're due may be seized and applied to your federal tax liability.

In some cases, you may be able to work with the IRS to decrease what you owe in penalties and interest if you can prove a hardship, but your case will be subject to IRS discretion.

Because the unpaid balance is subject to interest that compounds daily and a monthly late payment penalty, it is in a taxpayer’s best interest to pay a tax liability in full as soon as possible. If you are not able to pay in full, you may qualify for an installment agreement with the IRS with several options to pay.

You may discover interest rates and any applicable fees charged by a credit card company or bank are lower than the combination of interest and penalties imposed by the Internal Revenue Code. So, you may consider exploring outside options to pay the IRS in full and make other arrangements to avoid ongoing penalties and interest.

If you have any questions about the issue of filing and paying taxes you owe on time and in full, please contact one of our tax preparation specialists at McRuer CPAS.

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