Interest Rates on Federal Taxes - A Mixed Bag

Taxpayers who owe Uncle Sam a payment or two will be charged less interest on the debt beginning October 1, while those who overpay their taxes will receive less interest on their loan to the government.

The reduced rate results from the current record low-interest environment that’s created advantageous rates for borrowers and disappointing yields for lenders across the board. 

The IRS calculates interest rates for individual overpayments and underpayments as the federal short-term rate plus 3 percentage points. In today’s low-interest environment that lowers the rate for individual overpayments and underpayments to 3 percent. The rate was 4 percent for the previous two financial quarters and all of 2010. The new rates are based on federal rates for July 2011.

Corporations are charged interest at the federal short-term rate plus 5 percentage points, bringing the rate for corporate underpayments to 5 percent. Overpayments received 2 percent interest up to $10,000 and 0.5 percent for greater amounts.

In addition to interest on the amount owed, delinquent taxpayers also face Failure to Pay fines, according to the IRS website.

“While the majority of Americans get a tax refund from the Internal Revenue Service each year, there are many taxpayers who owe and some who can’t pay the tax all at once,” the IRS said in a publication called “Ten Tips for Taxpayers Who Owe Money to the IRS.”  

Tips include getting a loan to pay the bill in full, requesting additional time to pay in full or paying with a credit if the interest on the card is lower than the combination of interest and penalties charges by the IRS.

A break on interest penalties will provide relief for Americans who are behind on their tax payments, and may even help assuage the fears of Millionaire Investors who list taxes among their top three national concerns. Millionaires with a net worth of $1 million to $5 million (not including primary residence) worry most about the national debt (76 percent) and the political environment (72 percent), but 70 percent of those surveyed in March say they are also concerned about the possibility of tax increases. Worry about taxes has burgeoned from last year when 61 percent listed tax increases as a concern than ranked below terrorism and a prolonged economic downturn.

Though Millionaires worry about the potential for tax increases only 30 percent plan to alter their investment strategy.