If you cannot pay your taxes, then by law the IRS must charge interest on the underpayment of tax. The IRS computes its interest rate on the federal short-term rate and adjusts the rate every quarter. The IRS interest rates are compounded daily.
Recently, the IRS has announced that the interest rates on overpayments and underpayments of tax for the 2014 second quarter will remain unchanged. The IRS has announced the following rates:
- – 3 percent for overpayments, in cases other than corporations;
- – 2 percent for overpayments in the case of a corporation (except 0.5 percent for the portion of a corporate overpayment exceeding $10,000); and
- – 3 percent for underpayments (except 5 percent for large corporate underpayments).
In contrast, the New Jersey Division of Taxation computes its rates on outstanding tax balances at the Prime Rate plus 3%. NJ interest rates on underpayments are compounded annually. Currently, the Division of Taxation assesses 6.25% for tax underpayments.
When you can’t pay your taxes, the interest on the underpayment begins to accrue on the due date of the payment of tax without regard to filing extensions. Therefore, filing your 2014 tax extension is an extension of time to file, but not an extension of time to pay.
The temporary regulations, which are the IRS’s interpretation of the law, permit corporations to deduct interest paid on federal, state, and local underpayments. Unfortunately, interest paid by an individual on an income tax deficiency is non-deductible. This is one of the reasons that negotiating an IRS payment plan is not a great tax resolution for an individual taxpayer.
Unlike negotiating IRS tax penalties, reasonable cause is not the standard used to negotiate a reduction of interest. Rather, IRC 6404(e)(1) sets the following criteria:
a) the statutory period of limitations on filing a claim per IRC 6511 is open;
b) the claim is for tax years beginning after December 31, 1978;
c) the claim relates to income, estate, gift, and certain excise taxes (non-employment taxes);
d) an unreasonable IRS error or delay occurred in relation to the performance of ministerial or managerial act;
e) the IRS error or delay occurred after the taxpayer was contacted in writing with respect to the examination, deficiency, or payment; and
f) no significant aspect of the error or delay can be attributed to the taxpayer or their representative.
To negotiate the reduction of interest, all of the foregoing requirements must be satisfied. Because satisfying the above requirements is a difficult standard, the best way to negotiate tax interest is indirectly.
Tax interest accruals are based on the tax and penalties owed. Therefore, by reducing the tax owed and penalties through substantive challenges, you can reduce the interest accruals thereon.
Fortunately, if you can’t pay your taxes in full and must execute an IRS payment plan, the rates are at historic lows. Remember, the IRS interest rates on underpayments adjust quarterly and may be increasing soon.
Todd S. Unger, Esq. is a tax lawyer whose practice is devoted exclusively to handling tax disputes and tax collection matters. If you are having difficulty paying your taxes because of interest and penalties, then contact the Law Offices of Todd S. Unger, Esq. LLC today. Often times, you may not have negotiated the right solution or there better alternatives to resolving your tax matter. To discuss the negotiation of tax penalties and interest, call or email Todd Unger today (877) 544-4743.
View this updated blog post for updated news on IRS interest rates for 2015.
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