How Does the IRS Calculate Interest on Taxes?


Quick Answer

IRS interest penalties are generally based on a percentage of the amount of unpaid taxes owed. Fees accrue for various penalties, including late filing, late payment, failure to file and underpayment, according to the Internal Revenue Service.

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Full Answer

As of 2015, interest charged on unpaid taxes accrues at the federal short-term rate plus 3 percent and compounds on the unpaid amount as of the date due, with no regard to any extensions, according to the Internal Revenue Service. The federal short-term rate changes on a quarterly basis and is updated through an IRS news release.

If tax is not paid on time, a taxpayer is subject to a failure-to-pay penalty, according to the IRS. A failure-to-pay penalty is 0.5 percent of the tax owed for each month or part of a month that the tax goes unpaid, up to 25 percent as of 2015. This rate increases to 1 percent if the tax is not paid within 10 days of the IRS issuing a final notice. The interest charge on unpaid tax can be charged concurrently with the failure-to-pay penalty. If a taxpayer files on time and is paying through an installment plan, the rate drops to .25 percent.

If tax is due and a taxpayer does not file on time, a penalty for failure to file can also be assessed, according to the IRS. The combined failure to file penalty is 5 percent, which includes 4.5 percent for late filing and 0.5 percent for late payments, for each month or part of a month that a return is late, up to 25 percent.

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