Under the Internal Revenue Code, the interest rate used to calculate IRS penalties for underpayments is determined on a quarterly basis.
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When the IRS interest rate for underpayments is announced, the IRS also announces the IRS interest rate for overpayments. That's right. Although there are some exceptions, the IRS will pay you interest on overpaid taxes.
In fact, Section 6611 (a) of the Tax Code ensures that taxpayers receive interest on a tax overpayment. However, interest is not due on any overpayment refunded within 45 days after the return's due date.
For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and 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 5 percentage points.
The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
Long story short, the interest rates used to calculate the IRS interest rates are computed from the federal short-term rate. If you think you will be paying IRS penalties for underpaying taxes, that's good news because those rates have been flat of late.
IRS Interest Rates For First Quarter 2010
The IRS recently announced interest rates for the calendar quarter beginning January 1, 2010.
The underpayment tax penalty IRS interest rate and the overpayment IRS interest rate essentially stayed the same as they were in the prior quarter.
Those IRS interest rates are:
- four (4) percent for overpayments [three (3) percent in the case of a corporation];
- four (4) percent for underpayments;
- six (6) percent for large corporate underpayments; and
- one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.
Of course, rather than fret about IRS tax penalty interest rates, your best strategy is to avoid IRS tax penalties in the first place. You also want to avoid overpaying small business taxes because, assuming the IRS gives a refund in a timely manner, you won't earn any interest and will, in effect, be giving the U.S. government an interest-free loan.