The IRS charges interest on a variety of non-compliance issues and adjust them quarterly based on how the economy is doing. These apply to both personal and business returns.
The IRS news release IR-2022-206 and Rev. Rul. 2022-23 just announced that interest rates for the first calendar quarter of 2023 (beginning January 1) will increase to 7%. This is the fourth increase in a row. To illustrate the effect of interest rate increases over the past year, a taxpayer filing a 2020 return on March 15, 2022 with a balance due of $1,000 would owe about $25 in interest. A taxpayer filing a 2021 return on March 15, 2023 with a balance due of $1,000 would owe about $51 in interest.
For individuals, the rate for overpayments and underpayments will be 7% per year, compounded daily, up from 6% for the quarter that began on October 1. Here is a complete list of the new rates:
- 7% for overpayments (payments made in excess of the amount owed), 6% for corporations.
- 4.5% for the portion of a corporate overpayment exceeding $10,000.
- 7% for underpayments. (taxes owed but not fully paid)
- 9% for large corporate underpayments.
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. 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.
What I find amazing is that you get penalized for overpaying your estimated taxes!