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How Does the Rise in Interest Rates Impact You?
For the second time in 2022, the Internal Revenue Service (IRS) has announced an interest rate increase of 1% for both overpayments and underpayments for the calendar quarter beginning on July 1, 2022. Under the Internal Revenue Code, the IRS sets a new interest rate every quarter, but due to the low prevailing market rates, prior to Q2 of 2022, the agency had not updated the rate since Q3 of 2020. Whether you are filing as a corporation or an individual taxpayer, this interest rate hike could have critical consequences for those who have unpaid tax balances with the IRS. How is interest calculated on unpaid taxes? Interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly. Interest compounds daily and is charged on the sum of all outstanding taxes and penalties. Understanding overpayment & underpayment rates The overpayment rate is the sum of the federal short-term rate plus 3 percentage points. For corporations, it is the federal short-term rate plus 2 percentage points. For the portion of a corporate overpayment of tax exceeding $10,000, it is the federal short-term rate plus 0.5%. The underpayment rate is the sum of the federal short-term rate plus 3 percentage points, except underpayments for large corporations is the sum of the federal short-term rate plus 5 percentage points. Starting July 1, the new increased rates will be:
- 5% for overpayments (4% for corporations),
- 2.5% for the portion of corporate overpayment exceeding $10,000,
- 5% for underpayments, and
- 7% for large corporate underpayments.