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Understanding Interest Charged by the IRS

Tax is due to the Internal Revenue Service (IRS) on the return filing date. If you fail to pay all taxes owed when due, interest will be charged and continue to accrue from the return until it has been paid in full. Filing for an extension does not extend the time you must pay your taxes. Interest accrues on both penalties and interest. You will still be responsible for paying underpayment interest if you file an extension. 

When Does the IRS Charge Interest?

The IRS will charge underpayment interest when you do not pay your taxes, penalties, or addition to tax or interest by the specified date it is due. The interest rate is determined on a quarterly basis. The interest rate charged by the Internal Revenue Service is the federal short-term rate, in addition to three percent. Interest is charged on underpayments beginning on the date the amount you owe is due and will keep accruing until you have satisfied the balance. 

Interest will also be charged on penalties, including:

  • Late filing or paying
  • Understating valuations
  • Understating the amount of tax owed
  • Fraud
  • Accuracy-related penalties

With respect to interest on penalties, the amount of interest — and the date from which interest is charged — can vary based on the penalty. Interest cannot be reduced or removed from a penalty unless the penalty is abated. A penalty may only be reduced or removed if an error was made by the IRS or reasonable cause can be shown to the Internal Revenue Service. Interest itself will not be removed based on reasonable cause.        

What Are Your Options if You Owe Interest?

While the IRS will work with you on penalties, you cannot reduce interest. By reducing the penalties, the interest on the penalties will also be reduced. Still, if you owe underpayment interest to the IRS, you have several options. 

Your first option is to pay the balance in full to stop the underpayment interest from accruing each day. If you cannot afford to make the total payment, you may be eligible to apply for a payment plan which would let you satisfy the remaining balance under an installment agreement. If you can reduce the amount of tax or penalties owed by filing an amended return or by qualifying for penalty relief, the IRS will reduce the amount of interest in connection with the amount owed.  

Another option is to dispute the amount of interest owed. However, the IRS will only reduce the interest in such cases if it was applied because of an unreasonable error made by an IRS office or due to delay. If you are eligible to have the amount of interest owed reduced due to error or delay, you must submit Form 843 to the IRS or send a signed letter with your request.         

Contact an Experienced New York Tax Attorney

Owing a substantial amount of interest to the IRS can be overwhelming and stressful — and it’s essential to understand your options. A skillful tax attorney can advise you regarding the best course of action in your situation. Offering reliable counsel to individual taxpayers, businesses, entrepreneurs, and corporations, Brinen & Associates represents clients for a broad scope of tax matters at both the state and federal levels. Call (212) 330-8151 or send us a message to learn more about how we can assist you.   

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