Wednesday, December 7, 2016

Tax Procedure Book Errata - Interest Rates (12/7/16)

I provide interest rates for the more commonly encountered deferred payments (underpayments and overpayments) in Chapter 7, titled appropriate "Interest."  When I state the interest rate in the text, it is for the 3d quarter of 2016.  (That will be clear in the footnotes edition which cites the 2016 IRS publication.)  However, in the current text, I did not change the indicated quarter for the interest rates and thus said it was for 2014 or 2015.  That will be corrected in the next editions and going forward.

The interest rates for the first quarter of 2017 have recently been announced in IR-2016-159, Dec. 5, 2016 (with Rev Rul. 2016-28, 2016-51 IRB), here, are:

  • four (4) percent for overpayments [three (3) percent in the case of a corporation];
  • 1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • four (4) percent for underpayments; and
  • six (6) percent for large corporate underpayments [JAT note: sometimes called "hot" interest]. 

The announcement explains the basis for the interest as follows:
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.  
Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. 
The interest rates announced today are computed from the federal short-term rate determined during October 2016 to take effect Nov. 1, 2016, based on daily compounding.
Remember that these interest rates are adjusted quarterly.

In my practice, I generally have an accountant associated with my client representation.  The accountant makes the calculations when some degree of precision is required.  I generally just need to ball park the calculation in discussions with the client.  I use a software program called Tax Interest, here.  It is relatively inexpensive and very easy to use.  It is also more powerful than just for ball park calculations, but I just use it for my ball park calculations.  I find that some of the accountants with whom I work use that same program for making their interest and penalty calculations.