IRS Increases Underpayment Interest Rates for 2023

When taxpayers pay the Internal Revenue Service (IRS) less than they owe, interest begins to accrue immediately. Underpayment interest is calculated as a percentage of the unpaid amount, and this percentage changes based on fluctuations in the federal short-term rate.

As the IRS recently announced, the underpayment interest rates are increasing for 2023. For those who follow the news, this shouldn’t come as a surprise. Effective January 1, individual and corporate taxpayers that underpay their federal income tax liability will owe:

• Seven percent (7%) for individual underpayments and small corporate underpayments
• Nine percent (9%) for large corporate underpayments (defined as underpayments exceeding $100,000 in any taxable period)

This is in addition to remaining liable for the unpaid tax owed as well as any associated penalties (which also accrue interest under Section 6601 of the Internal Revenue Code).

Individual and Corporate Taxpayers’ Options for Minimizing Their Interest Liability for Underpayments

For taxpayers that owe interest to the IRS, there are a variety of options available for minimizing what they have to pay. Depending on an individual or corporate taxpayer’s circumstances, these options may include:

1. Filing an Amended Return

In some cases, taxpayers can file amended returns to reduce their liability for taxes, interest and penalties. Errors, omissions and various changes in circumstances may justify filing an amended return.

2. Filing for Interest Abatement

Individual and corporate taxpayers can file for interest abatement when they incur liability due to certain factors beyond their control. As the IRS explains, it “may reduce the amount of interest you owe if the interest is applied because of an IRS officer or employee's unreasonable error or delay.” Taxpayers seeking interest abatement must meet six criteria, and they must file Form 843 or a signed letter requesting abatement with the IRS.

3. Filing for Penalty Relief

The IRS offers penalty relief in various circumstances. If you qualify for penalty relief, then reducing or eliminating your penalty liability will have similar consequences for the interest accrued on these penalties. However, you will still owe interest on your (or your company’s) unpaid taxes.

4. Filing an IRS Appeal

Taxpayers who disagree with the IRS’ determination of their tax liability can challenge their tax, interest and penalty liability by filing an appeal. Tax appeals are handled by the IRS’ Independent Office of Appeals initially, but taxpayers who are not able to obtain relief here can take their appeals to court.

5. Submitting an Offer in Compromise

If you owe interest that you cannot afford to pay, then the most viable solution may be to submit an offer in compromise. Filing an offer in compromise allows taxpayers (both individual and corporate) to settle their federal tax debt for less than the full amount they owe.

Discuss Your (or Your Company’s) Options with Tax Lawyer Kevin E. Thorn in New Jersey

If you need to know more about disputing or seeking to reduce your (or your company’s) liability for taxes, interest or penalties, we encourage you to contact us promptly. To request a confidential consultation with tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 201-842-7696, email ket@thornlawgroup.com or contact us online today.