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Ask Phil: Penalties and Interest

Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses penalties and interest, including the most common penalties and how interest rates are calculated. 

Failure to File Penalties

Owing the IRS is much more than just owing a tax balance. The IRS also charges penalties and interest, the most common penalties being the Failure to File and Failure to Pay. The Failure to File penalty is charged on tax returns filed after the tax deadline or tax extension deadline without a reasonable cause. It accrues at a rate of 4.5% per month, beginning after taxes are due. For example, if you filed for a tax extension, you have until the usual October 15th deadline to file before penalties and interest begin to accrue. In 2023, the deadline is October 16th. If you did not file an extension, the deadline is April 15th  each year before the Failure to File penalty and interest begin to accrue. In 2023, the deadline was April 18th.   

Failure to Pay Penalties

The Failure to Pay penalty, on the other hand, accrues at 0.5% per month for every month or partial month that a tax balance remains unpaid. The day the Failure to Pay penalty begins to accrue is dependent on whether you filed a tax extension. If you file a tax extension, the Failure to Pay penalty will begin to accrue after the October tax deadline. If you do not file an extension, it will begin to accrue after the April tax deadline.  

IRS Interest Rates

The interest rates on these penalties are calculated based on the federal short-term rate, plus an additional 3%. Interest compounds daily until the balance is paid in full. The interest rates for underpayments in the first quarter of 2024 are as follows: 

  • 7% for individual underpayments  
  • 9% for large corporate underpayments 

Interest rates are determined each quarter. You can find the most up to date news on quarterly interest rates on the IRS website. 

Next week, Phil will discuss IRS enforcement. How long does the IRS have to collect back taxes? Can back taxes affect your credit score? Stay tuned for “Ask Phil” next Friday!  

If You Are Being Hit with IRS Penalties and Interest, Contact Us Today for a Free Consultation 

IRS Interest Rate Increases for Q1 of 2023

irs interest rate increases for q1 of 2023

While the Fed continues to increase interest rates, other entities are adjusting their own rates accordingly, the IRS included. In fact, the first quarter of 2023 has already seen an IRS interest rate increase that took effect January 1, 2023. Here’s what it means for taxpayers. 

How much did rates increase? 

Both overpayment and underpayment rates with the IRS increased from 6% to 7%. These rates are per year and are compounded daily. The rate for overpayments corporations is 6%. If the corporation’s overpayment exceeds $10,000, the excess payment will accrue interest at a rate of 4.5%. However, if a corporation underpays, it will be charged interest on the balance due at a rate of 9%.   

How will this affect taxpayers? 

Taxpayers receive an overpayment credit when their tax payments exceed what they owe. In other words, the rate increase will be good for those still waiting for past refunds. If a taxpayer is still missing their tax refund for 2022, they will receive 7% interest from the IRS, beginning January 1, 2023. The IRS adds interest to a tax refund if it takes more than 45 days after the filing deadline to process a return and refund. As of November 18, 2022, there were still over 3 million unprocessed individual 2022 tax returns. This figure does not include unprocessed returns from the previous tax years. 

Tax Relief for Those Who Owe 

The rate increase will be good news for those still waiting to receive their 2022 tax refunds. However, this is bad news for those who owe a tax balance. If a taxpayer owes taxes but does not pay the balance in full, the remaining balance will be charged underpayment interest. Because underpayments just became more expensive, it is essential to pay off your tax debt as quickly as possible to avoid even more interest charges. Now more than ever, neglecting your tax bill can be very costly due to the interest rate increases accompanied by the regular penalties for underpayment. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation