IRS Interest Rates

The Fed is on course to raise short-term interest rates several times this year, but for the third quarter of 2017 (July 1 through September 30, 2017), the IRS interest rate for individual tax overpayments and underpayments is staying at 4%, the same rate that has applied since April 1, 2016 (Revenue Ruling 2017-13, 2017-26 IRB 13).

Why is the rate 4%? The Internal Revenue Code provides that the quarterly IRS interest rate is 3% more than the federal short-term rate. For the third quarter, the relevant federal short-term rate is the short-term rate determined in April (first month of the second quarter). Since the April federal short-term rate was 1% (rounded to nearest full percent and based on daily compounding), the rate for the third quarter is 3% more than that, or 4%.

For corporations, the third quarter IRS interest rate on tax underpayments is generally 4% (same rate as for individuals), but for large corporate underpayments, the rate is 6% (5% more than the 1% federal short-term rate). The interest rate on a corporate overpayment is generally 3% (2% more than the 1% federal short-term rate), but on the portion of a corporate overpayment exceeding $10,000, the rate is limited to 1.5% (0.5% plus 1% federal short-term rate).