IRS Underpayment Penalties and Tax Interest Rates

Failing To Pay Taxes In Full or Paying Taxes Late

If you did not pay your taxes in full by the due date, there will be interest charged on the remaining balance as well as a small underpayment penalty (.5% per month typically). This is also called the Failure to Pay Penalty. If you get an extension to pay your taxes you will most likely incur this underpayment penalty and interest. This interest varies depending on whether you are a corporation, individual taxpayer, and how much you owe (which is discussed in detail below).

IRS Underpayment Interest Rates By Quarter

Quarter	Overpayment	Underpayment
Q3 19: 7/1/19-9/30/19	5%	5%
Q2 19: 4/1/19-6/30/19	6%	6%
Q1 19: 1/1/19-3/31/19	6%	6%
Q4 18: 10/1/18-12/31/18	5%	5%
Q3 18: 7/1/18-9/30/18	5%	5%
Q2 18: 4/1/18-6/30/18	5%	5%
Q1 18: 1/1/18-3/31/18	4%	4%
Q4 17: 10/1/17-12/31/17	4%	4%
Q3 17: 7/1/17-9/30/17	4%	4%
Q2 17: 4/1/17-6/30/17	4%	4%
Q1 17: 1/1/12-3/31/17	4%	4%
Q4 16: 10/1/16-12/31/16	4%	4%
Q3 16: 7/1/16-9/30/16	4%	4%
Q2 16: 4/1/16-6/30/16	4%	4%
Q1 16: 1/1/16-3/31/16	3%	3%
Q4 15: 10/1/15-12/31/15	3%	3%
Q3 15: 7/1/15-9/30/15	3%	3%
Q2 15: 4/1/15-6/30/15	3%	3%
Q1 15: 1/1/15-3/31/15	3%	3%

Note from 2012 to 2015, the rates stayed at 3%.

Penalty for Underpayment of Estimated Taxes – Failure to Pay On Time

This is a another type of underpayment penalty. Taxpayers many times are required to make estimated IRS tax payments for income earned on a quarterly basis (4/15, 6/15, 9/15, and 1/15). If you are a W-2 employee, your employer typically withholds and sends your taxes to the IRS for you. However, if you are self-employed, or have a side business as a W-2 employee, you could be responsible for estimated quarterly payments. If you fail to make these payments, an underpayment penalty is incurred. This penalty is calculated quarterly with an interest penalty applied to the underpayments. The charge accrues until the amount is paid or till the due date of the return (whichever comes first). In order to avoid this penalty, you can pay 90% of your total tax liabilities on your tax return, or 100% (110% percent if your AGI was more than $150k) of the taxes paid last year (whichever is less). In most cases, if you underpaid by less than $1k (after deducting with-holdings and credits) you will avoid this penalty.* To calculate any underpayment use Form 2210, Underpayment of Estimated Tax By Individuals. With many penalties, realize you can abate them or eliminate them in many cases if you can prove reasonable cause. Also note, that this penalty is not tax deductible.

*These calculations change if you are a fisherman or farmer so speak with a tax pro or call the IRS. If were not a US citizen the whole year, had no tax liabilities in 2012, and your 2012 tax year was a 12-month period, you normally do not have to pay estimated taxes.

IRS Interest Rates – How They Are Set and Determined

The IRS (Secretary rounds to the nearest percent) typically sets quarterly interest rates a few weeks before the start of a quarter. These interest rates serve to penalize those who do not pay their taxes or if you fail to make estimated payments. Furthermore, the IRS looks at it as if they are giving you a loan in a way because you owe them.

Determining an IRS Interest Rates for Non Corporate Entities

Underpayment interest rates are determined by the federal short term rate plus 3% for taxpayers. You can find historical federal interest rates at the tax almanac.

Determining an IRS Interest Rate As Small Corporate Payment (under $100k)

Generally, with a small corporation you take the federal short term rate plus 3%. For corporate underpayment interest rates under 100k, explore this link.

Determining IRS Interest Rate for Large Corporation or Payment

Generally, if you are a large corporation, and owe over 100k, you add the short term federal interest rate (rounded to zero) and add 5%. As a result, for a large corporation who owes over $100k, the interest rate would be 5%.

If you cannot make payments in full or haven’t, still file a tax return. If April 15th is approaching, and you believe you will need more time, request a tax return filing extension (in order to prevent a failure to file penalty). Realize, with a filing extension, you still need to pay what you can, but you will reduce the total amount you owe if you are granted the extension because you avoid any unfiled tax return penalty which is steep (5% per month up to 25% total of tax balance). Moreover, if you cannot pay the full amount you owe in taxes, you can always request an IRS Installment agreement which will cut the failure to pay penalty by 50%. If you owe money for taxes in the past, or from last year, use the contract form on the right for a free consultation and quote for guidance on your options at no charge and with no obligation to use the services.