The IRS interest rate on underpayments (e.g., deficiencies) and overpayments (e.g., refunds) are increasing for the first time in quite a while. For most taxpayers, the new rate of 5% will commence April 1, 2018. We thought a brief blog notifying our readers of the change (and how to determine the applicable interest rate) was appropriate.
The applicable IRS interest rate is calculated with reference to the short term adjusted federal rate (the “Short-term Rate”). The Short-term Rate is determined by the Secretary of the Treasury by averaging the market yield on outstanding marketable obligations of the United States (i.e., Treasury Bills or “T-Bills”) that have 3 years or less until maturity. See Code § 1274
The interest rate on underpayments and overpayments is determined on a quarterly basis. To calculate the applicable IRS interest rate, start with the Short-term Rate for the first month of the prior quarter and round that number to the nearest percent. Next add a designated amount of percentage points (discussed below) to the applicable Short-term Rate to determine the applicable interest rate. See Code § 6621; Rev. Rul. 2017-25; IR-2017-200.
For non-corporate taxpayers (e.g., individuals, trusts, estates, etc.), 3% is added to the applicable Short-term Rate for both underpayments and overpayments.
For corporate taxpayers, 3% is added to the applicable Short-term Rate for the first $100,000 in underpayment. For any amount of underpayment exceeding $100,000, the interest rate is calculated by adding 5% to the applicable Short-term Rate.
For corporate taxpayers, 2% is added to the applicable Short-term Rate for the first $10,000 in overpayments. For any amount of overpayment exceeding $10,000, the interest rate is limited to adding only 0.5% to the applicable Short-term Rate.
The Short-term Rate for October 2017 was 1.27%, which rounds down to 1%. Then 3% is added to get a rate of 4% on non-corporate underpayments and overpayments for the 1st Quarter of 2018. The applicable interest rate on non-corporate taxpayers has remained 4% since the 1st Quarter of 2016. Prior to that the interest rate on non-corporate underpayments and overpayments had been 3% since the 1st Quarter of 2011, which means that the Short-term Rate remained less the 0.5% during that timeframe.
However, interest rates are going to increase for the 2nd Quarter of 2018, because the Short-term Rate for January 1, 2018 was 1.68%, which rounds up to 2%. Therefore, for non-corporate taxpayers, an interest rate of 5% will apply to underpayments and overpayments during the 2nd Quarter of 2018. For corporate taxpayers, the interest rate will differ depending on the amount of the overpayment or underpayment, as explained above.