A blog post

Those Late Payments Just Became Cheaper

Posted on the 07 September, 2011 at 8:04 pm Written by in General

There are generally two words that you never want to hear from the IRS: penalties and interest. As you already know, the IRS has a laundry list of penalties for not paying the full amount of taxes due, that is topic for another discussion. On top of those penalties, you will have to pay interest, beginning from when the tax payment was due and lasting until the underpayment has been received by the IRS.

There are two words that are rare from the IRS: Good news! This is one of those rare days. Beginning October 1, 2011, changes will take effect to those interest rates. The IRS announced that underpayments will accrue interest charges at significantly lower rates than before.

Now you’re wondering, “How much interest do I have to pay?” According to Section 6621, the interest rate to be charged on underpayments is the sum of the Federal short-term interest rate and a fixed percentage amount. The IRS sets the interest rate on a quarterly basis. As of now, the Federal short-term interest rate is irrelevant in this equation, because IRS rules, in Notice 8859, that this number be rounded. Since it is so low, it is rounded to 0. When rates go up, so will the short-term interest rate.

The IRS announced that the fixed percentage component of the interest rate will be reduced starting the fourth quarter of 2011. For non-corporate tax payers, the rate is defined as the Federal short-term interest rate plus 3 percentage points. Small corporate tax payers with small underpayments is defined the same as non-corporate tax payers. For corporate tax payers with large underpayments, the interest rate is calculated as the sum of the Federal short-term interest rate plus 5 percentage points.

The IRS has reduced the all three categories by a full percentage point across the board as compared to the third quarter of this year. Unfortunately, you can’t win them all. The IRS has also reduced the interest rate they pay you for overpayments.