4th Quarter 2016 Underpayment and Overpayment Interest Rates

On September 14, 2016, the IRS announced that the 4th Quarter 2016 underpayment and overpayment interest rates will remain the same.  This means that, the 4th quarter 2016 IRS underpayment and overpayment interest rates will be as follows:

four (4) percent for overpayments (two (3) percent in the case of a corporation);
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code (IRC), the interest rates are determined on a quarterly basis; for taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. 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.

The IRS underpayment rates are especially important for US taxpayers who participate in the OVDP or a voluntary disclosure under the Streamlined Domestic Offshore Procedures. This is the case because the IRS underpayment rates are used to calculate the interest charged on any tax due as well as PFIC interest (default Section 1291 PFICs) on any excess distributions.

The IRS interest rates remained at 3% for from the 4th quarter of 2011 through the first quarter of 2016. However, in the second quarter of 2016, the IRS raised the interest rates from 3% to 4% following the increase of the federal short-term rate. The recent 4th Quarter 2016 IRS rates remain the same as in the second and third quarters of 2016. However, the situation may change in the 1st quarter of 2017 if the Federal Reserve raises its rates either in September or December of 2016.