First Quarter 2024 IRS Interest Rates on Overpayment & Underpayment of Tax

On November 17, 2023, the IRS announced that the First Quarter 2024 IRS interest rates on overpayment and underpayment of tax will not change from the Fourth Quarter of 2023.

This means that, the First Quarter 2024 IRS interest rates will be as follows:

  • eight (8) percent for overpayments (seven (7) percent in the case of a corporation);
  • eight (8) percent for underpayments;
  • ten (10) percent for large corporate underpayments; and
  • five and a half (5.5) of a percent for the portion of a corporate overpayment exceeding $10,000.

Internal Revenue Code (“IRC”) §6621 establishes the IRS interest rates on overpayments and underpayments of tax. Under §6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points for individuals and 2 percentage points in cases of a corporation. There is an exception to this rule: with respect to a corporate overpayment of tax exceeding $10,000 for a taxable period of time, the rate is the sum of the federal short-term rate plus one-half of a percentage point.

Under §6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Again, there is an exception for a large corporate underpayment: in such cases, §6621(c) requires the underpayment rate to be the sum of the relevant federal short-term rate plus 5 percentage points. The readers should see §6621(c) and §301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date.

Pursuant to the IRC §6621(b)(1), the First Quarter 2024 IRS interest rates were computed based on federal short-term rates for October 2023 to take effect on November 1, 2023, based on daily compounding.

It is important to note that the First Quarter 2024 IRS interest rates are relevant for a great variety of purposes. Let’s highlight three of its most important uses. First, these rates will determine the interest a taxpayer will get on any IRS refunds.

Second ,the rates will also be used to establish the interest to be added to any additional US tax liability on amended or audited tax returns. This also applies to the tax returns that were amended pursuant to Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Finally, the First Quarter 2024 IRS interest rates will be used to calculate PFIC interest on any relevant §1291 PFIC tax. This PFIC interest will be reported on the relevant Form 8621 and ultimately Form 1040.

We at Sherayzen Law Office constantly deal with the IRS interest rates on overpayments and underpayments of tax. This is why we closely follow any changes in these IRS interest rates, including the First Quarter 2024 IRS interest rates.

International Tax Lawyers | Passive Foreign Investment Company

Congress enacted the Passive Foreign Investment Company provisions (PFIC) as part of the Tax Reform Act of 1986 in order to deter U.S. investors from deferring or avoiding payment of U.S. taxes by investing in offshore entities. The PFIC rules are structured to provide a disincentive for U.S. investors to defer investment income taxes by owning passive investments in foreign companies that do not regularly distribute their earnings. If it is determined that a U.S. investor is a PFIC shareholder, there can be severe tax implications for the taxpayer.

U.S. taxpayers who are shareholders of PFIC are likely to pay a significant additional tax on realized gains from sales of PFIC shares, and on PFIC dividends that meet the definition of “excess distributions” (an “excess distribution” applies to gains or distributions that exceeds 125% of the average distributions for the previous three years, or less if applicable). In both cases, the tax is applied at the taxpayer’s ordinary income tax rate, regardless of whether capital gains rates would typically apply. Further, an interest charge may be imposed, to offset the years of tax deferral in holding the offshore investment. As an additional disincentive, PFIC shares may not receive a stepped-up cost basis at the shareholder’s death.

Definition of a PFIC and Two-Part Test

In general, a foreign corporation that is determined to be neither a “controlled foreign corporation” (CFC) as defined in IRC section 957, nor a “foreign personal holding company” (FPHC) as defined in IRC section 552, will be determined to be a PFIC if it includes at least one U.S. shareholder and meets either one of the two tests found in IRC section 1297. If at least 75% or more of its gross income is passive income (based upon investments as opposed to operating income), or if at least 50% of the average percentage of its assets are investments that produce, or are held for the production of passive income, the foreign corporation will meet the definition of a PFIC. Passive income generally includes interest, dividends, rents, capital gains, and similar items. There is no requirement of ownership of a certain minimum percentage of shares, as there is with CFCs or FPHCs. Thus, if the test is met, PFIC status will apply, even if a shareholder owns a minimal percentage of shares with no ability to influence the business decisions of the company.

The PFIC rules apply to each U.S. person (the precise definition of who constitutes U.S. person is beyond the scope of this article, but it may become an issue in many situations) rerarding who a shareholder of a PFIC is. PFIC rules, however, do not apply to foreign shareholders or the foreign corporation itself. PFICs may include different types of entities such as various investment vehicles and foreign-based mutual funds.

Two options are commonly suggested by the U.S. tax lawyers to the shareholders in order to avoid PFIC taxation burden: Qualified Election Fund and Mark-to-Market. Both of these options, however, have their own peculiar characteristics and impose different types of tax obligations on the shareholders.

Qualified Electing Fund

In general, U.S. shareholders who own shares either directly or indirectly in a PFIC may be able to avoid the burdensome standard PFIC taxation provisions by electing to treat the PFIC as a Qualified Electing Fund (QEF) on Form 8621. Shareholders making this annual election are taxed on their pro rata share of the PFIC’s ordinary earnings as ordinary income, and their pro rata share of the net capital gains as long-term capital gain. A shareholder’s basis in the stock of a QEF is increased by the earnings included in gross income and decreased by a distribution from the QEF to the extent of previously taxed amounts. Finally, U.S. shareholders interested in making this election must also be able to obtain the required information from the PFIC.

While treating a PFIC as a QEF may be beneficial in that it allows taxpayers to opt out of the standard PFIC tax and interest rules, it also forces shareholders to pay taxes currently on undistributed income earned by a foreign corporation. Thus, QEF may be of limited use to taxpayers who lack adequate liquidity to pay taxes. Another important point about a QEF is that, due to the complexity of the rules and possible additional tax amounts, if the decision is made to elect QEF treatment of PFIC, it may be advisable to elect a QEF in the first year of holding an offshore investment.


Another option for U.S. shareholders of a PFIC (who do not elect to treat a PFIC as a QEF), is to elect the mark-to-market method. This election is only available if the shares are considered “marketable stock”. Marketable stock is regularly traded stock with an ascertainable value on recognized exchanges as defined in the IRC regulations. If the shareholder elects to mark the stock to market, he will annually report, as ordinary income, the amount equal to any excess of the fair market value (FMV) of the PFIC stock as of the close of the taxable year over the adjusted basis of the shares (i.e. as if the shares had actually been sold at FMV). If the adjusted basis of the PFIC shares exceeds its FMV as of the close of the taxable year, the shareholder may generally deduct an ordinary loss (subject to certain statutory limitations).

Shareholders who directly own shares in a PFIC electing the mark-to-market method may increase their adjusted basis in PFIC shares through income recognized, and decrease the adjusted basis through deductions taken.


The tax issues surrounding PFICs are very complex and should be handled by a tax professional. Sherayzen Law Office can help you analyze your tax situation, determine whether PFIC rules apply, identify the alternatives in light of your whole tax situation, and implement the tax strategy most suited to your business and investment needs.

Contact Sherayzen Law Office to discuss your tax situation with an experienced tax lawyer!