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Resources:
Tax Education: Interest
A
tax liability begins the second the IRS assesses the tax.
Usually assessment occurs when the taxpayer files and
return or when the IRS files a return on behalf of the taxpayer
(called “substitute for return”).
Once the liability is created, and it is not paid,
interest begins to accrue.
The
interest is not easy to compute.
First, the interest rate is set by a formula rather than
a simple rate. The
formula is based on the short-term federal interest rate.
Second, the interest rate fluctuates quarterly.
Third, it compounds daily.
Fourth, the interest accrues on both the tax and
penalties owed.
Because
the interest compounds daily and accrues on both tax and
penalties, it is not unusual for the interest to eventually
exceed the tax owed. Tax
collection is one area where procrastination definitely does not
pay.
Penalties
can be reduced by the IRS, which is called abatement.
Interest generally cannot be abated.
The few cases where it can be abated are as follows: (1)
Cases where the IRS erroneously computed the interest.
(2) Interest accrued during an improper IRS delay.
(3) Where the IRS improperly sent a refund, only to later
seek to get it back with interest. (4) The IRS failed to notify the taxpayer that tax was owed
within 18 months after the return due date or the date the
return was filed. (5)
The interest accrued on a return filed late while the taxpayer
was living in a federally declared disaster area.
Where
the taxpayer overpays taxes, the taxpayer is entitled to
interest from the IRS from the date of the overpayment.
The interest rate is again formula driven, and it varies
depending on the nature of the taxpayer.
Individuals get a higher interest rate than corporations.
The interest compounds daily.
The interest does not accrue, however, during any period
during which the return was filed late.
For more information contact
us at taxhelp@taxdefendant.com
or
Toll Free 866-216-1930
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