IRS Says Interest Rates to Increase in Q2 2022

The Internal Revenue Service (IRS) announced Feb. 23, 2022, that interest rates for underpayments and overpayments will increase for the second quarter 2022.

As of April 1, 2022, and through June 30, 2022, underpayment rates for taxpayers and corporations will be 4%, compounded daily. The rate on corporate underpayments that exceed $100,000 will rise to 6% for that period.

Taxpayers who overpay and don't receive their refund within 45 days will earn 4% interest compounded daily. Corporations will receive 3% except in the case of corporate overpayments of more than $10,000. Corporations will only receive daily compounded interest of 1.5% for the amount that exceeds that threshold.

Under IRS Code, the rate of interest paid or charged is determined on a quarterly basis and based on this formula: IRS rate = [Quarterly Rate] + [Federal Short-Term Rate]. The quarterly rate, set by statute, varies depending on the type of taxable entity and whether it is an interest-bearing overpayment or underpayment. For Q2 2022, the applicable federal short-term rate is 1%.

Key Takeaways

  • The IRS announced on Feb. 23, 2022, that interest rates charged and paid on underpayments and overpayments will increase by 1% for Q2 2022.
  • The formula for IRS interest rates is: [Quarterly Rate] + [Federal Short Term Rate] = IRS rate.
  • Rates are determined quarterly according to IRS Code Section 6621.
  • The standard non-corporate interest rate is 3% plus the federal short-term rate with variations for corporations, depending on the amount of the underpayment or overpayment.
  • Your refund for an overpayment must be more than 45 days late before the IRS begins to calculate interest payable to you.
  • In the case of an underpayment, you have until the "pay by" date to pay before interest and penalties kick in.

Calculation of Interest Paid and Charged

The determination of the rates of interest on overpayments and underpayments of taxes is covered by Section 6621 of the Internal Revenue Code. Section 6621 says the overpayment rate is the sum of the federal short-term rate plus 3% for noncorporate entities (regular taxpayers) and plus 2% in the case of a corporation. The code also stipulates that any portion of a corporate overpayment that exceeds $10,000 receives interest equal to the sum of the federal short-term rate plus 0.5%.

IRS interest rates only apply to the specified quarter and do not affect rates paid or charged in previous quarters or years.

IRS Code sets the underpayment rate as the sum of the federal short-term rate plus 3%, except for large corporate underpayments, which are set at 5% plus the federal short-term rate.

The Secretary of the Treasury determines the federal short-term rate for the first month in each calendar quarter which applies during the following calendar quarter. Further, for purposes of interest paid or charged, the federal short-term rate is rounded to the nearest full percent.

The tables below show the IRS interest rates for both underpayment and overpayment for the quarter beginning April 1, 2022.

IRS Interest Rates for Underpayments for Q2-2022
 Underpayment Type Applies To Rate Compounded
 Standard Corporate and non-corporate underpayments  4% Daily
Large Corporate  Corporate underpayments > $100,000  6% Daily
IRS Interest Rates for Overpayments for Q2-2022
 Overpayment Type Applies To Rate Compounded
Standard Non-corporate overpayments 4% Daily
Corporate  Corporate overpayments 3%  Daily
Large Corporate  Corporate overpayments > $10,000 1.5%  Daily

Understanding IRS Interest and Penalties

If an individual (or corporation) overpays on the taxes they owe, they are due a refund. If the IRS doesn't issue the refund in time (usually 45 days), the individual or company is entitled to interest on the money the IRS kept longer than the law allows.

Interest received from the IRS is considered taxable just like bank interest and must be reported on your tax return the following year.

Individuals or corporations who underpay—that is don't pay the full amount of tax they owe—are subject to penalties as well as interest on the amount they owe. Not only that, the longer the taxpayer or corporation takes to pay, the more interest accrues, not only on the amount of taxes owed, but also on the penalty.

Penalties are levied for infractions other than insufficient tax payments. There are penalties for everything from failing to furnish required information, failure to file or pay taxes, inaccurate returns, and more.

The date from which the IRS begins to charge interest varies by the type of penalty. Interest is an incentive to pay the penalty sooner since it increases the amount you owe until you pay the entire amount due.

Article Sources
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  1. Internal Revenue Service. "Interest rates increase for the second quarter of 2022."

  2. Internal Revenue Service. "Section 6621—Determination of Rate of Interest."

  3. Internal Revenue Service. "Quarterly Interest Rates for Underpayment and Overpayment of Tax."

  4. Internal Revenue Service. "Instructions for Forms 1099-INT and 1099-OID (01/2022)."

  5. Internal Revenue Service. "Penalties."