How to Compute the Interest on an IRS Balance That Is Due

Paying your taxes on time eliminates any interest due.

If you do not pay all of your federal taxes on time, the Internal Revenue Service charges interest on the balance that is due. Interest is separate from any penalties the IRS charges. The interest rate changes each quarter. The interest rate equals the federal short-term interest rate plus 3 percent. When the IRS sends you a bill for the amount you owe, it will include any interest due and any associated penalties.

Instructions

1. Determine how long the money has been due. For example, you owed the money on April 15 and paid on July 31. This period stretches three months and 15 days. It also spans the first and second quarters of the year.

2. Find the corresponding federal short-term interest rates associated with your quarters and add 3 percent to the rate. In the example, for 2010 the rates associated with the months would be 0.67 percent, 0.79 percent, 0.74 percent and 0.61 percent. The IRS rounds up at 0.5, so each month is 1 percent. Adding 3 percent to this is 4 percent.

3. Determine the amount you have outstanding. This is your tax liability from your Form 1040 minus any taxes paid or withheld. In the example, assume you owe $500.

4. Multiply the interest rate by the amount owed for each month. Prorate any month that is not a complete month. In the example, $500 times 4 percent times 15/30 for April, then $500 times 4 percent for May, June and July.

5. Add the amounts for each month to find the total amount due.

References

• IRS: Tax Topic 653 IRS Notices and Bills, Penalties and Interest Charges
• Evans Legal: Applicable Federal Rates for 2010