Introduction: Welcome to our tax planning blog! If you’ve been delaying your tax payments or taking a last-minute approach to your taxes, it’s time to pay attention. The IRS interest rates have recently reached the highest levels we’ve seen in 15 years. In this article, we’ll discuss the impact of these interest rates on underpaid or late paid taxes and provide you with valuable tips to avoid penalties and save money. Let’s dive in!
Understanding IRS Interest Rates: With the significant increase in overall interest rates during 2022, the IRS has also raised its interest rates, especially for underpaid or late paid taxes. According to §6621(a), the IRS underpayment rate is generally the federal short-term rate plus 3%. In 2023, the 1st quarter rate for individuals is 7%, compared to 3% in the same quarter of 2022. The IRS “borrowing cost” has more than doubled in just a year. If interest rates continue to rise, the IRS rate could potentially reach 8% or 9%.
The Cost of Late Payments: Late payments can be particularly costly when it comes to tax returns. If you don’t fully pay your tax return balance due by the unextended due date, you’ll be subject to interest (currently 7%) and the §6651(a)(2) failure to pay penalty (0.5% of the balance due per month late). This adds up to a total borrowing cost of 13%!
Let’s consider a scenario with a $10,000 Form 1040 balance due not paid until October 15th and examine the related interest and penalties over the last three tax years:
- Tax Year 2020: The total accruals amounted to $452, including $300 for the failure to pay penalty and $152 in interest.
- Tax Year 2021: The total accruals reached $537, comprising $300 for the failure to pay penalty and $237 in interest.
- Tax Year 2022: Assuming the IRS interest rate remains at 7% for the rest of 2023, the total accruals would be $657, with $300 for the failure to pay penalty and $357 in interest.
As you can see, the interest costs have significantly increased. Previously, interest amounted to $157 per $10,000 of tax due over six months, but now it costs $357 for the same time frame.
Estimated Quarterly Tax Payments: To avoid these hefty interest charges and penalties, it’s crucial to stay on top of your estimated quarterly tax payments. Here are the due dates for estimated quarterly tax payments in 2023:
- April 15, 2023
- June 15, 2023
- September 15, 2023
- January 15, 2024
Who Needs to Pay Estimated Tax Payments? Individuals, including sole proprietors, partners, and S corporation shareholders, should pay estimated tax payments if they expect to owe more than $1,000 in tax.
Common Mistakes and How to Avoid Them: One of the most common mistakes is not paying tax payments on time. By ensuring you make your tax payments on or before the due date, you can save a significant amount of money in additional charges. The IRS charges interest on any unpaid taxes from the due date until the date of payment, and penalties for late payments can accumulate quickly.
Final Recommendations: To help you avoid unnecessary costs and penalties, here are some final recommendations:
- Make your estimated tax payments on time and mark the due dates on your calendar.
- If you have the means to make an estimated tax payment, don’t hold onto the cash. Paying the IRS on time is more cost-effective than leaving money in a savings account.
- If you can’t pay the full balance due, pay as much as you can by each due date.
- Implement a budget to improve cash flow and prevent falling behind on tax payments.
- Consider making tax payments more frequently, such as monthly or every two weeks, to break down the tax bill into more manageable amounts.
By following these recommendations, you can stay ahead of your tax payments, avoid costly penalties, and save money in the long run.
Remember, timely tax payments are crucial, especially with the recent rise in IRS interest rates. Don’t let procrastination cost you. Plan ahead, pay on time, and keep your tax obligations in check!
We hope you found this information valuable. For more tax planning tips and insights, keep following our blog.
