When was the last time you paid attention to the changing interest rates on your tax bill? There are many reasons that you might have a tax bill accruing interest every month. Perhaps you have set up an Installment Agreement, or you underpaid your taxes. You might not have filed a tax return and now have a large tax debt consisting of your original tax liability as well as the penalties and interest. Because the IRS changes its interest rates every quarter, you might find that the amount accruing starts to rise, increasing your tax bill.
How the IRS Calculates Interest Rates
The IRS calculates the interest rate every quarter using the formula, the federal short-term rate plus 3 percentage points. The IRS recently announced that the interest rates have increased for the current calendar quarter that begins April 1, 2018. For a long time, the federal short-term rate was at 0, so the IRS interest rate was 3 percent. However, the federal short-term rate has started to rise, leading to a higher interest rate for taxpayers. For the second quarter of 2018, the rates will be 5 percent, although corporations might have a different rate.
Interest starts to accrue from day one when a tax payment isn’t paid on time. It continues to accrue until you have completely paid your bill. It is important to remember that the due date for paying your taxes might be different than that of filing your return. For example, if you apply for an extension to file your taxes in October, you are still expected to estimate your tax payment and pay it by the April 15 due date. As long as you pay 90% of what your total tax payment is once you file in October, then you are fine. If you underpay, then you will be charged interest and penalty fees. Those who have to pay estimated quarterly taxes might find penalty fees and interest if they underpaid these estimated taxes once they file their annual return.
Checking the Current Interest Rate
With the interest rate potentially changing every quarter, it is beneficial to know how to check the latest interest rates. The best way to check the current interest is to visit the IRS website or the Federal Reserve. You will also see reflections of the different interest rates in your bill. You might find information about the IRS interest rates and/or the federal short-term rate from reputable business news outlets, but it is always beneficial to go right to the source.
Why the Interest Rates Matter
If you are not able to pay your tax bill on time, it can quickly become a worse financial situation once penalty fees and interest are added to it. In addition to the interest charges, which is now five percent, you also will owe penalty fees, which are:
- Failure to pay: 0.5% per month (capped at 25%)
- Failure to file: 5% per month (capped at 25%)
- Failure to file and failure to pay: 5%
- Installment Agreement: 0.25% per month
There might be other penalty payments involved as well, such as a minimum penalty of $205 or 100% of the unpaid tax, whichever is lower.
Can You Reduce Your Interest Payments?
The IRS has set up options for negotiating your tax bill with the Fresh Start Initiative. These include programs such as Installment Agreements, Offer in Compromise, Penalty Abatement, and Innocent Spouse Relief. Through this, it is possible to reduce your bill, including removing the penalty fees that might turn a big tax bill into one that you cannot pay. However, the IRS generally does not have any way to reduce or remove interest payments on your bill. The interest is calculated on the amount you owe, so the actual interest you owe will go down as the amount you owe goes down. However, there is not relief on the actual interest payments.
Therefore, it is to your benefit to act now and try to pay off your tax debt as soon as possible so that you do not have to deal with increasingly higher tax bills due to penalty fees and interest. You might even have to deal with higher interest payments as the federal short-term rate inches higher every quarter.
If you are ready to deal with your federal tax debt, then contact Fidelity Tax Relief at 877-372-2520. Our tax professionals will review your situation and discuss the options with you, which might include reducing your liability and making it easier for you to pay down your debt and get free of the IRS.