How Does The IRS Determine Interest Rates?Under the Internal Revenue Code, the IRS determines interest rates on the underpayment and overpayment of taxes quarterly. IRS Notice 746 contains the IRS' periodic interest rates. According to irs.gov:
- For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus three 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 IRS compounds interest daily, except on late or underpaid estimated taxes for individuals or corporations;
- 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.
Additionally, the IRS charges interest on penalties for late filing, late paying, over or understating valuations, and substantially understating the tax you owe. The IRS will continue to charge interest until the total accrued tax liability, including penalties is paid in full. Interest will be compounded daily except on late or underpaid estimated taxes for individuals or corporations.