On March 7, 2018, the Internal Revenue Service announced that the IRS underpayment and overpayment interest rates have increased for the second quarter of 2018. The second quarter of 2018 begins on April 1, 2018 and ends on June 30, 2018.
The second quarter of 2018 IRS interest rates will increase by one percent and will be as follows:
five percent for overpayments (four percent in the case of a corporation);
two and one-half percent for the portion of a corporate overpayment exceeding $10,000;
five percent percent for underpayments; and
seven percent for large corporate underpayments.
The IRS increased its underpayment and overpayment interest rates for the last time in the second quarter of 2016.
Under the Internal Revenue Code, the rate of interest for the second quarter of 2018 is determined on a quarterly basis. The second quarter of 2018 overpayment and underpayment interest rates are computed based on the federal short-term rate determined during January 2018 to take effect February 1, 2018, including daily compounding.
Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
This increase in the IRS underpayment and overpayment interest rates for the second quarter of 2018 is highly important and will have an impact on many US taxpayers. In particular, I would like to point out two principal areas impacted by this increase in the second quarter of 2018 IRS interest rates.
First, this increase means that the taxpayers will have to pay a higher interest on any underpayment of tax as calculated on the amended tax returns. This includes the payments that US taxpayers must make pursuant to the IRS Offshore Voluntary Disclosure Program and the Streamlined Domestic Offshore Procedures.
Second, the increase in the interest rates for the second quarter of 2018 directly affects the calculation of PFIC interest due on any “excess distributions”. It is important to remember that PFIC interest cannot be offset by foreign tax credit.