On 8/25/23, the IRS announced that Interest rates increase for the fourth quarter 2023 would increase to 8% per year for the calendar quarter beginning 10/1/23 for taxes owed but not fully paid by individual taxpayers (“underpayments”). The 8% interest rate is up from 3% in December 2021 – a 167% increase for taxes owed but not fully paid. Although not much buzz was made back in August 2023, many taxpayers that underpay their taxes could find themselves with a hefty surprise tax bill given the steep increase in the interest rate.
The underpayment of estimated tax by individuals penalty
The penalty applies to individuals, estates, and trusts if they don’t pay enough estimated tax on their income or if they pay it late. The penalty may apply even if the IRS owes the taxpayer a refund.
How does the Taxpayer Know that they owe the penalty?
IRS sends a notice if a taxpayer owes the Underpayment of Estimated Tax by Individuals Penalty.
How IRS Calculates the taxes owed penalty?
IRS calculates the amount of the Underpayment of Estimated Tax by Individuals Penalty based on the tax shown on the taxpayer’s original return or on a more recent return that the taxpayer filed on or before the due date. The tax shown on the return is the total tax minus the total refundable credits.
IRS calculates the taxes owed penalty based on:
- The amount of the underpayment
- The period when the underpayment was due and underpaid
- The interest rate for underpayments that IRS publishes quarterly
Interest on a Penalty
IRS charges interest on penalties. Currently, the rate is 8%. Interest increases the amount that the taxpayer owes until the taxpayer pays their balance in full.
This steep interest rate increase was coming due to the tax gap!
On 2/27/23, GAO (the U.S. Government Accountability Office) issued a Report on the Tax GAP: Modest Reductions in the Gap Could Yield Large Fiscal Benefits. The “tax gap” (the difference between what taxpayers owe and what they pay on time) has been a persistent problem for the U.S. government for decades and the enforcement of tax laws is on GAO’s High-Risk List. Taxpayers that are underreporting, underpaying, and not filing taxes ought to get their affairs in order given that the IRS in on a path to modernize taxpayer service and enforce tax laws. The Internal Revenue Service reminds taxpayers about the importance of timely filing and paying their taxes, and that there are several options available to help people having trouble paying. Moreover, taxpayers should file on time, even if they can’t pay the full amount due. Then, they should pay the rest as soon as they can. The sooner paid, the less owed in terms of added interest and penalties.
Out of compliance Taxpayers Ought to Come Forward First
Get Started with coming into compliance. If you are out of compliance, do not wait to come forward. There are options available for non-compliant Taxpayers if the IRS does not contact them first. Consult a specialized Tax Advisor for your best option now.
