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 a🌃nd 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%.

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-termಌ 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 Code sets the underpayment rate as the sum of the federal short-term rate plus 3%, except for large corporate underpay⛄ments, which are set at 5% plus the feཧderal 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. Furth൩er, 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.

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.

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.