On September 7, 2018, the IRS announced that the 4th Quarter 2018 underpayment and overpayment interest rates will not change from the 3rd Quarter of 2018.
This means that, the 4th quarter 2018 IRS underpayment and overpayment interest rates will be as follows:
- five (5) percent for overpayments (four (4) percent in the case of a corporation)
- five (5) percent for underpayments
- seven (7) percent for large corporate underpayments; and
- two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000.
Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. This means that the next change in the IRS underpayment and overpayment interest rates may occur only for the 1st Quarter of 2019. In fact, if the analysts are correct, it may very well happen in early 2019.
The 4th Quarter 2018 underpayment and overpayment interest rates are important for many reasons. Not only are these rates used to determine what the IRS will charge in case of an amended tax return (including an amended return made as part of an offshore voluntary disclosure), but they will also determine the interest rate for any adjustments made by the IRS during an audit.
Moreover, the IRS underpayment rates are used to calculate the interest charged on the PFIC (default IRC Section 1291) tax due on an excess distribution. It should be remembered that PFIC calculations de facto remain outside of the Statute of Limitations and PFIC interest can be charged on any PFIC gains made in 2018 but allocated to any prior year (all the way to 1988).
It is important to prevent some US tax accountants from falling into a common trap concerning distributions of accumulated income from a foreign trust. There is a myth that the interest rates on UNI tax is calculated based on the IRS underpayment and overpayment interest rates. This is incorrect – the Throwback Rule follows a separate method for calculating the interest on the UNI tax.
Sherayzen Law Office continues to track any changes IRS makes to its overpayment and underpayment interest rates.