On February 23, 2022, the Internal Revenue Service (“IRS”) announced that the 2022 Second Quarter IRS underpayment and overpayment interest rates (“2022 2Q IRS Interest Rates”) will increase from the first quarter of 2022. This means that, the 2022 2Q IRS interest rates will be as follows:
- four (4) percent for overpayments (three (3) percent in the case of a corporation);
- one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000;
- four (4) percent for underpayments; and
- six (6) percent for large corporate underpayments.
The second quarter will start on April 1, 2022.
Under the Internal Revenue Code, these interest rates are determined on a quarterly basis. The IRS used the federal short-term rate for February of 2022 to determine the 2022 2Q IRS interest rates. The IRS interest is compounded on a daily basis.
The 2022 2Q IRS interest rates are important for many reasons for US domestic and international tax purposes. For example, the IRS will use these rates to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an amendment of his US tax return through Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. The IRS will also utilize 2022 2Q IRS interest rates with respect to the calculation of PFIC interest on Section 1291 tax.
As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment and overpayment interest rates on a regular basis. Since our specialty is offshore voluntary disclosures, we often amend our client’s tax returns as part of an offshore voluntary disclosure process and calculate the interest owed on any additional US tax liability. In other words these interest rates are relevant to Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, IRS Voluntary Disclosure Practice, Delinquent International Information Return Submission Procedures and Reasonable Cause Disclosures. We also need to take interest payments into account with respect to additional tax liability that arises out of an IRS audit.
Moreover, we regularly have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.
Finally, it is important to point out that the IRS will use the 2022 2Q IRS interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. This situation may also often arise in the context of offshore voluntary disclosures.
Thus, the IRS underpayment and overpayment interest rates have an impact on a lot of basic items in US tax law. Hence, it is important to keep track of changes in these rates on a quarterly basis.