As the threat of prolonged inflation begins to push interest rates higher, the Internal Revenue Service is also raising the IRS interest rate it charges delinquent taxpayers, as well as increasing the interest it pays to tax filers who are owed refunds.
Here is what you need to know about the new IRS interest rate and how it could impact your taxes and tax debt this year.
What Is the New IRS Interest Rate?
In November 2022, the IRS announced interest rate increases for both underpayments and overpayments. These IRS interest rate changes take effect January 1, 2023.
The new IRS interest rate charge on underpayments is 7%, except for large corporate underpayments, on which 9% interest is charged.
For overpayments, the IRS will now pay 7% interest to individuals and 6% interest to corporations on the amount that exceeds the total tax due for that quarter. For any portion of a corporate overpayment exceeding $10,000, the IRS will pay 4.5% interest.
2023 Q1 IRS Interest Rates Table:
|7%: Overpayments for Individuals|
|7%: Underpayments for Individuals|
|6%: Overpayments for Corporations|
|4.5%: Corporate Overpayment > $10,000|
|9%: Large Corporate Underpayments|
What Was the Previous IRS Interest Rate?
The previous IRS interest rate was 1% lower across the board. Individuals: 6% for underpayments and overpayments. Corporations: 6% for underpayments, 5% for overpayments, and 3.5% for any portion of a corporate overpayment exceeding $10,000.
How Much Is the IRS Interest Rate Increase?
The IRS raised its interest rate for both overpayments and underpayments by 1% for individuals and corporations. For individuals, the new IRS interest rate for underpayments is 7% and overpayments is also 7%.
How Often Does the IRS Change Interest Rates?
The IRS reviews interest rates every quarter, or four times per year, but they do not always raise or lower them. Changes to the IRS interest rate depend on several factors, including economic conditions, inflation, and the federal short-term rate, to name a few.
The IRS has increased interest rates four consecutive quarters (2022 Q2, 2022 Q3, 2022 Q4, and 2023 Q1). Since Q1 of 2022, IRS interest rates for individuals have increased from 4% to 7% for both overpayments and underpayments.
When Does the IRS Start Charging Interest?
The IRS starts charging interest on underpayments the date taxes are due. Note that if you request an extension to file taxes and the IRS approves it, you will still begin accruing interest from the original due date if you owe taxes, though you will avoid also getting charged a failure to file penalty.
As mentioned earlier, the amount of interest charged depends on the IRS interest rate, which can change every 3 months.
When Does the IRS Stop Charging Interest?
The IRS stops charging interest when your taxes are paid in full. In some cases, the IRS will reduce or remove penalty interest if a penalty was reduced or removed. This can happen when you qualify for first time penalty abatement or reasonable cause penalty relief.
Does the IRS Offer Interest Relief?
No, the IRS does not offer interest relief. According to the official IRS website, it is legally required by law to charge interest on unpaid taxes until the balance is paid in full.
That said, the IRS does offer penalty relief in certain situations, such as when circumstances beyond your control prevent you from paying your full tax bill on time. If the IRS reduces or eliminates your penalty, then the interest associated with that penalty is also reduced or eliminated.
How Can You Reduce IRS Interest You Owe?
You can reduce the IRS interest you owe by filing an amended tax return or applying for penalty relief. An amended return corrects errors on your initial tax return. If those errors resulted in a higher IRS interest charge than you should have received, then the amended tax return will reduce your IRS interest. The IRS might grant penalty relief which results in lower interest associated with that penalty.
How Can You Dispute IRS Interest You Owe?
You can dispute the IRS interest you owe if you believe it is too high because of an error or delay by the IRS. To file an IRS interest dispute, you can either submit Form 843 or send the IRS a signed letter stating the reason for the dispute.
IRS Interest Rates History
IRS Interest Rates 2023 Q1 (Increase from Q4 2022)
IRS Interest Rates 2022 Q4 (Increase from Q3 2022)
IRS Interest Rates 2022 Q3 (Increase from Q2 2022)
IRS Interest Rates 2022 Q2 (Increase from Q1 2022)
IRS Interest Rates 2022 Q1 (Same as Q4 2021)
IRS Interest Rates 2021 Q4 (Same as Q3 2021)
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