IRS Increases Interest Rates in Quarter 2
The Internal Revenue Service announced that the Q2 interest rates increased effective April 1, 2022 through June 30, 2022. These rates are determined on a quarterly basis by the IRS and are set by statute and vary depending on the taxable entity as well as if an overpayment or underpayment occurred. The new interest rates for Q2 will be the following:
4% for overpayments and 3% for overpayments for a corporation
1.5% for the portion of a corporate overpayment exceeding $10,000
4% for underpayments
6% for large corporate underpayments
For noncorporate entities or regular taxpayers, the overpayment and underpayment rate is the sum of the federal short term rate plus 3%. For corporations, on the other hand, the underpayment rate is the federal short-term rate plus 3%, while overpayment is the federal short-term rate plus 2%.
However, there is a difference for large corporate underpayments. The rate for large corporate underpayments is the sum of the federal short-term rate plus 5%. If a corporate overpayment of tax exceeds $10,000 for a taxable period then then the rate is the federal short-term rate plus .5%.
The reason these interest rates are in place is to help individuals when the IRS holds money longer than the law allows or when taxpayers or corporations do not pay the full amount of tax they owe. For example, if a taxpayer overpays on the taxes that they owe, they should receive a refund from the IRS. If the IRS doesn’t issue this refund in a timely manner, then the individual is entitled to interest on the money that the IRS has retained.
On the other hand, if a taxpayer underpays, then they may be subject to a penalty and interest on the amount that they still owe. Essentially, the longer it takes the individual to pay the IRS, the more interest that accrues which therefore creates more money for the taxpayer to pay back.
We recommended consulting with your tax professional if you have any questions regarding overpayments and underpayments and the rates that will apply to your specific situation.
Ideally, you never have an underpayment, and your tax paid through payroll withholdings or estimated tax payments isn’t too much greater than the tax owed overall.
