Interest on Underpayment of Tax

By | March 5, 2015

Interest on underpayments of tax is imposed at the federal short-term rate plus three percentage points The interest rates, which are adjusted quarterly, are determined during the first month of a calendar quarter and become effective for the following quarter. Currently, in 2015 and 2016, the interest rates remain very low and paying interest on tax payments will  be of minor consequence to many taxpayers.

 

Interest Accruing on Tax Payments

Interest accrues from the date the payment was due, determined without regard to any extensions of time, until it is received by the IRS, although no underpayment interest accrues for failure to timely pay individual or corporate estimated tax. Interest is compounded daily. For all four quarters of 2014, the interest rate on underpayments is three percent.

 

Who is liable for interest on unpaid taxes?

If a carryback of a net operating loss, net capital loss, or other credit carryback eliminates or reduces a deficiency otherwise due for such earlier year, the taxpayer remains liable for interest on unpaid income taxes (including deficiencies later assessed by the IRS) for the carryback year. The entire amount of the deficiency will be subject to interest from the last date prescribed for payment of the income tax of the carryback year up to the due date (excluding extensions) for filing the return for the tax year in which the loss or credit occurred

 

Overlapping Overpayments and Underpayments

The interest rates for overpayments and underpayments have been equalized for any period of mutual indebtedness between taxpayers and the IRS

Abatement of Interest. The IRS has the authority to abate interest in cases where the additional interest was caused by IRS errors or delays. However, the IRS may act only if there was an error or delay in performing either a ministerial act or a managerial act, including loss of records by the IRS, transfers of IRS personnel, extended illness, extended personnel training, or extended leave, and only if the abatement relates to a tax of the type for which a notice of deficiency is required.

 

What type of taxes are affected?

These taxes would be those relating to income, generation-skipping transfers, estate, gift, and certain excise taxes, but not employment taxes or other excise taxes. Taxpayers requesting an abatement of interest generally must file a separate Form 843 for each tax period for each type of tax with the IRS Service Center where their tax return was filed or, if unknown, with the Service Center where their most recent tax return was filed.

 

Suspension of Interest

In order to avoid the accrual of underpayment interest, a taxpayer may make a cash deposit with the IRS for future application against an underpayment of income, gift, estate, generation-skipping, or certain excise taxes that have not been assessed at the time of the deposit. To the extent that a deposit is used by the IRS to pay a tax liability, the tax is treated as paid when the deposit is made, and no interest underpayment is imposed. Furthermore, if the dispute is resolved in favor of the taxpayer or the taxpayer withdraws the deposited money before resolution of the dispute, interest is payable on the deposit at the federal short-term rate.