Interest Rates for Federal Tax Underpayments To Increase in 2023

In a Revenue Ruling published on November 29, 2022, the Internal Revenue Service (IRS) announced that the interest rates for federal tax underpayments will increase in 2023. When individual and corporate taxpayers pay less than they owe, interest begins to accrue immediately—often in addition to liability for financial penalties.

As the IRS explained in an accompanying News Release, the underpayment interest rate is the federal short-term rate plus three percentage points in most cases. However, for large corporate underpayments, the interest rate is the short-term rate plus five percentage points. This means that for 2023, the federal tax underpayment interest rates will be:

• Seven percent (7%) for individual underpayments and small corporate underpayments
• Nine percent (9%) for large corporate underpayments

Under Section 6621(c)(3) of the Internal Revenue Code, a “large corporate underpayment” is defined as “any underpayment of a tax by a C corporation for any taxable period if the amount of such underpayment for such period exceeds $100,000.”

Avoiding (or Minimizing) Liability for Federal Tax Underpayment Interest

For individual and corporate taxpayers alike, the best way to avoid owing interest to the IRS is to pay what they owe on time. As noted above, interest begins to accrue immediately, and, as the IRS makes clear, “[i]nterest is due as it accrues.”

But, for many taxpayers, this simply isn’t possible. Whether they do not have the funds needed to cover their federal tax liability or they have already underpaid, avoiding liability for interest is no longer an option. Instead, they will need to focus on mitigating their liability (as the IRS also makes clear, “We don't remove or reduce interest for reasonable cause or as first-time relief”). Depending on the circumstances at hand, this may involve:

• Filing an Amended Return – If you can file an amended return that reflects reduced federal income or employment tax liability, the IRS will “automatically reduce the related interest.”
• Applying for Penalty Relief – If you qualify for penalty relief from the IRS, reducing your penalties through this process will also result in a reduction of the interest on the penalties you owe.
• Submitting an Offer in Compromise – If you cannot afford to pay what you owe, you may be able to reduce your total liability to the IRS by submitting an offer in compromise. However, you will still have to make at least a partial payment while your offer is pending.
• Filing an Appeal – If you disagree with the IRS’ determination of your (or your company’s) tax liability, you can file an appeal. If your appeal is successful, you will not owe interest on any taxes that the IRS improperly imposed.

Contact Thorn Law Group in Boston

If you or your company owes interest to the IRS and you would like to know more about the options for minimizing your or your company’s liability, we invite you to get in touch. To request an appointment with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 617-692-2989, email ket@thornlawgroup.com or contact us online today.