How the IRS Calculates Interest

The Internal Revenue Service (IRS) charges individuals and corporations interest for underpayment of taxes. However, the IRS pays interest on overpayments. The rate of interest varies depending on the category of underpayment or overpayment.

Federal Short-Term Rate

The IRS determines interest rates on underpayment and overpayment amounts by adding a predetermined annual percentage to the federal short-term interest rate.

Updates

The IRS updates interest rates each quarter. The rate for the upcoming quarter is published in the Internal Revenue Bulletin. Call the IRS at 800-829-1040 to get the current rates.

Individuals

The IRS charges individuals interest on underpayments and pays interest on overpayments at a rate equal to the federal short-term rate plus 3 percent.

Corporate Underpayment

Corporations pay interest for underpayments at a rate equal to the federal short-term rate plus 3 percent. For large companies, this is raised to 5 percent.

Corporate Overpayment

The IRS pays interest on corporate overpayments at 2 percent plus the federal short-term rate. Overpayments exceeding $10,000 earn the short-term rate plus 0.5 percent.

Calculation

The IRS calculates interest daily. Daily interest is figured by multiplying the balance by the annual interest rate divided by 365.

References

• IRS: Interest Rates Remain Unchanged
• IRS: Notices on Bills, Penalties and Interest

Resources

• IRS: Internal Revenue Bulletin