How to Calculate IRS Interest
If you owe the IRS money for unpaid taxes, you must pay it by April 15 or you will be charged interest. The IRS also charges interest if you underpay estimated taxes. At the same time, the IRS pays you interest on overpayment amounts for estimated income taxes. The same rules apply to corporations, although the rates are different. All interest charged by the IRS is calculated from the date the amount is due until the date it is paid and is compounded daily.
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Instructions
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Find the applicable federal short-term interest rate. IRS interest rates are set each quarter based on the federal short-term rate plus a standard percentage. The rates for the upcoming quarter are announced in the Internal Revenue Bulletin, usually in the last weekly issue of the current quarter. Alternatively, call the IRS taxpayer help line at 800-829-1040 and ask for the current short-term rate.
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Determine the applicable interest rate by adding the appropriate percentage to the federal short-term rate. For corporations, interest charged on underpayments in the third quarter of 2010 will be the federal short-term rate plus 3 percent (5 percent for large corporations). The IRS will pay interest on overpayments of estimated taxes by corporations at the federal short-term rate plus 2 percent (this drops to 0.5 percent for amounts over $10,000). For individuals, the interest rate charged or paid on overpayments of estimated tax will be equal to the federal short-term rate plus 3 percent. For example, during the third quarter of 2010, the federal short-term rate will be 1 percent. The rate for individuals on past due taxes will be therefore 1 percent plus 3 percent, for a total of 4 percent.
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Divide the interest rate by 100 to convert to decimal form. For instance, 4 percent works out to 4/100 = 0.04.
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Multiply the balance of taxes due by the interest rate and divide by 365 to find the daily interest charged. For example, if you owe $1,000 and the interest rate equals 0.04, you will be charged $1,000 x (0.04/365) = $0.109589041 (a bit less than 11 cents). This is the daily interest for the first day.
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Add the daily interest (without rounding off the amount) to your starting balance to find your ending balance after one day.
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Use your ending balance from the previous day to calculate the daily interest for the current day. Add this daily interest amount to your balance. Repeat this calculation for as many days as the tax remains unpaid (or for as long as you have a positive balance due to an overpayment of estimated income tax).
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Tips & Warnings
The IRS normally uses the federal short-term rate for the first month of the current quarter to set interest rates for the upcoming calendar quarter. Thus, the April 2010 rate was used for the third calendar quarter of 2010.
The federal short-term interest rate is a one-month average of the interest rates for U.S. marketable debt securities having maturities of 3 years or less.
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