Tax

IRS Raises Interest on Underpayments

Corporations that haven't paid a large amount of quarterly taxes will be hit with a rate of 7 percent.
Ed ZwirnSeptember 2, 2004

The Federal Reserve isn’t the only government entity hiking rates these days.

The Internal Revenue Service announced that in the fourth quarter, corporations and individuals will pay 5 percent interest for underpayments on taxes, a boost of 1 percentage point from the present quarterly level. For “large corporate underpayments” — those over $100,000 for the period — the new rate will be 7 percent, also a 1 percentage point increase.

In the case of tax overpayments, the IRS will reimburse corporations at the rate of 4 percent, while individuals will get 5 percent. The portions of corporate overpayments exceeding $10,000 will be paid 2.5 percent in interest.

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Under the Internal Revenue Code, the interest rate is gauged on a quarterly basis. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points, and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points.

For taxpayers other than corporations, the overpayment and underpayment rates are the federal short-term rate plus 3 percentage points. The rate on the part of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half of a percentage point.

The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during July 2004. They go into effect on October 1.