The Internal Revenue Service announced on Nov. 23, 2021, that interest rates charged on underpayment or paid on overpayment of taxes will remain the same for the calendar quarter beginning January 1, 2022.
Taypayers who underpay will be charged a rate equal to 3% plus the federal short-term rate beginning January 1. The rate is the same for underpayments of $100,000 or less by corporations. For corporate underpayments greater than $100,000, the charged interest rate beginning Jan. 1, 2022 will be 5% plus the federal short-term rate.
The highest recorded underpayment/overpayment IRS interest rate for the period Feb. 1, 1982, to Dec. 31, 1982.
The interest rate paid on overpayments by regular taxpayers will continue to be 3% plus the federal short-term rate for Q1-2022. For corporate overpayments of $10,000 or less, the rate will be 2% plus the federal short-term rate. For any part of a corporate overpayment in excess of $10,000, the IRS will pay 0.5% plus the short-term rate.
- The IRS announced on Nov. 23, 2021, that interest rates charged and paid on underpayments and overpayments will remain stable for the first quarter of 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/overpayment.
- The IRS generally will not pay interest on normal overpayment of taxes until the refund is more than 45 days late.
- You have until the "pay by" date to pay outstanding taxes before interest and penalties kick in.
How IRS Interest Rates Are Determined and Applied
The IRS determines interest rates quarterly according to Internal Revenue Code Section 6621. If you wanted to express IRS interest rates as a formula it would look like this: [Quarterly rate] + [Federal short-term rate] = IRS interest rate.
The rates announced on Nov. 23 are based on the federal short-term rate (0.22%) that took effect on November 1, 2021. IRS interest rates are compounded daily whether for overpayment or for underpayment.
Changes to IRS interest rates do not affect interest rates charged or paid in prior quarters or years.
The tables below show the exact rates for both underpayment and overpayment for the quarter beginning Jan. 1, 2022.
|IRS Interest Rates for Underpayments for Q1-2022|
|Underpayment Type||Who It Applies To||Rate||Compounded|
|Standard||Corporate and non-corporate underpayments||3.22%||Daily|
|Large Corporate||Corporate underpayments >$100,000||5.22%||Daily|
|IRS Interest Rates Paid on Overpayments for Q1-2022|
|Overpayment Type||Who It Applies To||Rate||Compounded|
|Large Corporate||Corporate overpayments >$10,000||0.72%||Daily|
When Overpayment or Underpayment Interest Applies
You may be wondering where your interest payments are for all the years you had too much withheld from your salary or paid higher-than-necessary estimated taxes. Unfortunately, overwithholding or paying too much in estimated taxes alone does not generate interest. In fact, you've likely heard various tax experts warn against overwithholding because you are, in essence, lending the government your money at zero interest.
Any interest you receive from the IRS is considered taxable and must be reported on your tax return the following year.
Overpayment of Taxes
If the IRS is late in getting your refund to you, the government is required to pay you interest starting on whichever of the following dates is the latest:
- Tax return filing date [+45 days]
- Late-filed return received date [+45 days]
- Date an incomplete or erroneous return is corrected and filed [+45 days]
- Date the overpayment is made [+45 days]
The IRS has 45 days to issue your refund without paying interest on it.
Underpayment of Taxes
The IRS charges interest on underpayment if you don't pay by the filing due date. This applies even if you file an extension. In addition to interest, there are also separate penalties that may apply. Penalties vary depending on the type of underpayment and other factors and include Failure to File, Failure to Pay, and Accuracy-related issues. Interest, which is compounded daily, is due as it accrues. If you receive an underpayment notice you have until the "pay by" date to settle up and avoid interest charges.
Special Rules for COVID-19
Many taxpayers whose 2019 returns showed refunds also received interest due to late payments from the IRS. Although the regular April 15 filing deadline was postponed to July 15, 2020, interest in these cases accrued from the original April 15 filing deadline. The interest rate applied even to taxpayers who waited until July 15 to file. In addition, the normal 45-day administrative delay was waived.
What is the IRS underpayment interest rate for 2022?
3% plus the federal short-term rate (0.22%) for a total rate of 3.22% for most filers. The IRS sets interest rates on a quarterly basis. There are separate rates for corporations, depending on the amount of underpayment.
Will the IRS pay me interest if I overpay on my taxes?
In most cases, no. The IRS will pay interest if it is late in paying your refund. Late is defined as more than 45 days after the filing due date in most cases.
How Are IRS Interest Rates Compounded?
Interest rates charged or paid by the IRS are compounded daily, meaning each day the interest is calculated on the previous day's balance plus interest.
Internal Revenue Service. "Interest rates remain the same for the first quarter of 2022." Accessed Nov. 24, 2021.
Legal Information Institute. "26 U.S. Code § 6621 - Determination of rate of interest." Accessed Nov. 24, 2021.
Internal Revenue Service. "Quarterly Interest Rates for Underpayment and Overpayment of Tax." Accessed Nov. 24, 2021.
Internal Revenue Service. "Section 1274.--Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property." Accessed Nov. 24, 2021.
Internal Revenue Service. "Interest on Underpayments and Overpayments." Accessed Nov. 24, 2021.
Internal Revenue Service. "Coronavirus Tax Relief: 2019 tax refund interest." Accessed Nov. 24, 2021.