How Much Interest Does the IRS Charge? IRS Interest Explained!
The IRS is increasing its interest rates beginning in October 2023! I’ll get into that, but first, how does the IRS even determine its interest rates?
How Is the IRS Interest Rate Calculated?
The IRS has different interest rates for different things, depending on what type of taxpayer you are — an individual or a corporation — as well as whether the interest is being applied to an underpayment to the IRS or on an overpayment to the IRS.
But I’m assuming that if you’re watching this video you’re wondering about IRS interest rates on individuals and not corporations.
And under Section 6621 of the Internal Revenue Code (IRC), the IRS interest rate on both individual underpayments of tax and individual overpayments of tax — yes, the IRS can pay you interest on your refund (and I’ll talk more about the rules there later in this article) — is the federal short-term rate (and I’ll talk about what that is) plus three percent.
What Is the Federal Short-Term Rate?
So naturally, you’re asking, “What is the federal short-term rate?”
And IRC Section 1274(d)(1)(C)(i) states:
“The federal short-term rate shall be the rate determined by the Secretary based on the average market yield (during any 1-month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of three years or less.”
So the federal short-term rate for any given month is basically the average yield of U.S. securities like T-bills with remaining periods to maturity of not more than three years.
And so what the IRS does is calculate the federal short-term rate for the month three months before the first month of the quarter in question — so for Q4 2023, which begins in October 2023, the IRS is going to use as the base for its interest rate the federal short-term rate for the month three months before October 2023, which is July 2023 — round it to the nearest full percent under IRC Section 6621(b)(3), and add three percentage points to that, and that rate becomes the IRS interest rate for individuals for that quarter.
And so last Friday, the IRS issued an advance version of Rev. Rul. 2023-17, which maps all this out.
Author:
Logan Allec, CPA, Founder and Owner
Logan Allec has been serving taxpayers as a CPA for nearly 12 years. After leaving his role at a "Big 4" firm, he started Choice Tax Relief to help everyday Americans who have found themselves behind on their taxes. He also educates thousands of people daily about tax relief on his YouTube channel. In addition to his CPA license, Logan also has a Master's Degree in Taxation from the University of Southern California (USC). He lives with his wife and children in the Los Angeles area. Learn more about Logan here.
