IRS Basics: When the IRS Charges Interest

If you owe tax to the Internal Revenue Service (IRS) and do not plan to pay right away, the amount you owe could quickly increase with added interest and penalties.

The IRS charges interest on unpaid balances. The agency also charges interest on penalties that may be assessed, like failure to pay taxes on time. Many people believe filing for an extension of time to file their return also extends the due date for tax payments—unfortunately, it does not.  You can receive an extension, but can also be penalized for not paying your taxes when originally due. Other commonly assessed penalties include failing to pay estimated tax, failure to file your tax return on time, or sending an uncollectible (bad) check. IRS interest accrues as long as the debt is unpaid and added to the total unpaid taxes and penalties assessed.

Here are some things to understand about interest paid on tax liabilities:

• Oftentimes you will receive a notice when the IRS assesses a penalty or alerts you to an unpaid or underpaid tax obligation. Do not ignore the notice because it tells you when your payment in full is due. If you pay your tax and any penalties assessed by the due date, you will not pay interest on the sum.
• Assessed interest can quickly boost your tax liability. The current interest rate for an individual taxpayer for underpayment of their tax obligation is eight percent.
• The amount of interest you pay can be reduced in some cases. If filing an amended return impacts the penalties assessed, the amount of interest assessed is automatically adjusted.  Qualified taxpayers may also be eligible for penalty relief.

The IRS also pays interest in situations where tax has been overpaid. If you overpaid your taxes, the IRS pays interest on the latest of dates that include when the payment was made or processed, the return due date, or the date a late tax return was filed. Keep In mind: if you overpay your taxes, the IRS has 45 days of administrative time to process and refund your overpayment without paying any interest on it.

Interest on an existing tax debt quickly compounds. If you or your business is assessed penalties and interest, speak with an experienced tax attorney knowledgeable about the IRS to map out your best plan for relief.

Speak to our legal group when facing tax litigation or a large tax liability

From offices in Cleveland and Chicago, our tax group is focused on civil and criminal defense of business owners and individuals pursued by the IRS or who are already facing allegations. When you have tax questions, call 440-250-9709 or contact us online today.