On December 6,
2018, the IRS announced that both overpayment
and underpayment interest rates for the quarter beginning January 1, 2019, were
increasing over the previous quarter. The new rates will be:
- 6% for noncorporate taxpayer
overpayments (5% for corporations) - 6% for noncorporate underpayments
(8% for large corporations) - 3.5% for a portion of a corporate
overpayment exceeding $10,000
How the Overpayment and Underpayment Interest Rates Are Determined
Interest rates
are determined on a quarterly basis as per the Internal Revenue Code. In
general, noncorporate taxpayers face the federal short-term rate plus three
percentage points if they overpay or underpay their taxes. In this case, the
short-term rate was determined during October 2018 and took effect on November
1.
For corporations, underpayment interest rates are typically the same as it is for noncorporate taxpayers and the rate for overpayment is the same rate plus two percentage points. For the portion of a corporate tax overpayment exceeding $10,000 during a taxation period, the federal short-term rate plus one-half of a percentage point applies.
Dealing
with IRS Overpayments
If you pay too
much to the IRS, either by incorrect estimation of your tax payments or
inaccurate income tax withholding, you are credited for the overpayment and the
IRS will refund the surplus to you. Most refunds are issued within 21 days,
but it could take longer if:
- The return contains errors
- The return is incomplete
- You are claiming certain tax
credits - There are concerns about fraud or
identity theft”
In general, if
the IRS does not issue your refund within 45 days of accepting your return, it
must pay you interest for each additional day. This amount, which is taxable,
should automatically be attached to your refund.
IRS
Underpayments
Underpayments can
happen for a number of reasons. Salaried workers occasionally claim the wrong
number of allowances on their W-4 or earn a lot of outcome income (e.g.,
through investments or side jobs) that leaves them in an underpayment scenario
although they filled out their W-4 correctly. Freelancers and self-employed
individuals don’t have tax automatically withheld from their income, so they
may miscalculate how much they owe.
Unlike sole
proprietors and single-member LLCs, corporations pay their business tax
separately from their owners’ personal income tax, but miscalculations or
failure to pay the total amount due to financial constraints can still occur.
If you underpay
your business or personal taxes, you may be able to avoid a penalty if:
- Your tax liability is less than
$1,000 after estimated tax payments and withholdings are subtracted. - You did not incur any tax
liability the year before. - You paid at least 90% of the tax
due for the current year, or 100% of what was owed the previous year, whichever
is smaller. (This rule works differently for those with a higher income: a New
Jersey tax law attorney can advise you of how it might apply to your own
situation.)
The IRS may also
waive an underpayment penalty at its own discretion if you did not make an
estimated tax payment due to an unusual situation such as a casualty or
disaster. The other situation where the IRS may agree to waive the penalty may
apply to you if:
- You retired after the age of 62 OR
- You became disabled
- You had a good reason for failing
to make the payment - You did not intentionally refuse
to make the payment
If you or your
company are in a situation where you cannot realistically pay the amount owed
(including penalties), a New Jersey tax attorney can guide you through
alternatives such as:
- An IRS payment plan that allows
you to repay your tax debt over time. - An Offer in Compromise that enables
you to settle the debt for less than the full amount.
Contact a Skilled Tax Law Attorney Today
If you find
yourself in a situation where you have underpaid the IRS, contact Paladini Law. Attorney Brad
Paladini will review your situation and advise you on whether an Offer in Compromise, payment plan, or another
arrangement can settle your tax debt in a manner that you can afford. We have
helped many individual and business clients overcome their tax challenges and
will do the same for you. For more information, please call 201-381-4472.
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