Sam Brotman, JD, LLM, MBA December 16, 2013 3 min read

How IRS Interest is Calculated

You are required to file a return if you have earned income in the previous year. You are also required to pay all tax by the due date to avoid IRS interest and penalty charges. The official due date to file and pay taxes is April 15. This is the “deadline for most people to file their individual income tax return and pay any tax owed” (IRS.gov, “Topic 653 – IRS Notices and Bills, Penalties and Interest Charges,” 7/26/2013). All U.S. tax returns are checked for mathematical accuracy. In the event that you owe money to the IRS, you will be sent a bill. With this in mind, familiarize yourself with the different types of penalties and IRS interest charged to your tax balance as well as the procedures and methods used to calculate interest and penalties.

For example, there is an IRS interest charge on the unpaid tax. Unpaid tax is determined by the balance due from the date of the return to the date of payment (“Topic 653”). “The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest is compounded daily” (“Topic 653”). When filing a return, if you fail to pay all of the balance when due, you will have to pay a late payment penalty “of one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25% maximum penalty is reached” (“Topic 653”).

It is important to note that the one-half of one percent rate will increase to one percent when the tax is unpaid for 10 days; and this is the time maximum for after the IRS issues a notice of intent to levy. In other words, the IRS will issue the notice when the tax remains unpaid for 10 days. On the other hand, if you file by the return due date, “the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect” (“Topic 653”). Failure to file on time and pay the tax owed will result in the IRS charging penalties.

IRS interest charges can add a significant balance to your tax liability. It is important to take care of your IRS balance as soon as possible or you will continue to accrue interest.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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