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.

Summary of Interest Start Date Rule (12/10/12)

The IRS has released ILM 201249015 (8/14/12), here, discussing the interest start date for a tax due with a gift tax return.  The ILM plows no new ground but does provide a succinct summary of the interest start date rule. I quote the conclusion:

Interest Start Date 

If any amount of tax is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid. I.R.C. § 6601(a). Similarly, interest shall be paid on any unpaid amount of tax from the last date prescribed for payment of the tax (determined without regard to any extension of time for payment) to the date on which payment is received. Treas. Reg. § 301.6601-1(a)(1). The due date of a gift-tax return is generally April 15th of the year following the year in which the gift was made. I.R.C. § 6075(b). In general, the date prescribed for payment is the time fixed for filing the return, determined without regard to any extension of time for filing. I.R.C. § 6151(a). For determining interest on underpayments, "the last date prescribed for payment" is determined without regard to any extension for payment or filing. I.R.C. § 6601(b)(1). In this case, the assessment will be made for the Year 1 tax year; the due date of the Year 1 gift tax return was Date 1. Underpayment interest will thus run on the assessed deficiency from Date 1. I.R.C. § 6601(a). 

Updates on Interest Rates (9/23/12)

In my Federal Tax Procedure text, I state the interest for quarters earlier than the 3d quarter of 2012.  The following are the interest rates for the third quarter of 2012.  Please keep in mind that these interests rates are provided for illustration only.  The interest rates can change each quarter, depending upon the federal short term rates.

INTEREST RATES FOR THIRD QUARTER 2012

Underpayment interest rate - 3%  [Text footnoted p. 244, nonfootnoted p. 174]
Underpayment larger corporate (Hot Interest) rate - 5% [Text footnoted p. 244, nonfootnoted p.  174]

Overpayment rate - general - 3% [Text footnoted p. 255, nonfootnoted p.   181]
Corporate overpayment rate - general - 2% [Text footnoted p. 255, nonfootnoted p. 182]
Large Corporate Ovepayments (over $10,000) - .5% [Text footnoted p. 255-6 nonfootnoted p.  182]

See the IRS web page on these interest rates here.