The IRS wants its tax money and it wants it now. Even if you pay all the taxes you owe when you file your tax return for the year, you’ll be charged an underpayment penalty if you didn’t pay enough taxes during the year.
The provision to hire 87,000 new IRS agents in the recently signed Inflation Reduction Act is part of the plan to catch people who don’t pay their taxes on time. But the federal tax collection agency is tightening the noose even before the first new agent is hired.
Beginning October 1, 2022, the IRS is raising the underpayment rate for individuals by 1% to a new annual rate of 6% compounded daily.
For companies, the rates for the fourth quarter will be:
- Corporate underpayment: 6% (up from5% this quarter)
- Large corporate underpayment: 8% (up from 7%)
- Corporate overpayment: 5% (up from 4%)
- The portion of a corporate overpayment exceeding $10,000: 3.5% (up from 2.5%)
The IRS adjusts these rates quarterly. For individuals and corporations, the underpayment rate is the federal short-term rate plus 3 percentage points. Large corporations are charged the federal short-term rate plus 5 percentage points.
In the event you paid too much and the IRS owes you money, and in the event the IRS has to pay you interest because they didn’t get your refund to you in time, the overpayment interest rate is going up too. Just like the underpayment rate, the new overpayment rate for individuals is going up 1% to an annual rate of 6%. Here are the IRS regulations about paying you interest.
In general, we pay interest on the amount you overpay starting from the later of the:
- Tax return filing due date
- Late filed tax return received date
- Date we get your return in a format we can process
- Date the payment was made
We stop paying interest on overpayments on the date we refund your overpayment (and interest) or offset it to an outstanding liability.
Exception: We have administrative time (typically 45 days) to issue your refund without paying interest on it.
There’s nothing in the IRS document that states whether the interest you’re due is compounded daily.