Tax Attorney Serving the State of New Jersey Including Bergen County
The Internal Revenue Service recently announced the interest rate for the fourth quarter of 2017 for underpayments will remain at 4%. The IRS interest rate changes every quarter. The IRS interest rate is based on federal short-term rate plus 3 percentage points. In the last few years, it’s hovered between 3% and 4%.
If you have federal tax debt, the IRS interest rate sounds like a great deal at 4%. And it is. But remember the interest is on top of the failure to pay penalty, which is 0.5% a month, or 6% a year. And if you forgot to file your taxes, there’s an additional failure to file penalty of 5% a month.
So while the interest rate is better than a credit card, you must factor in which penalties apply and if they have maxed out. You also must consider if you’d qualify for an IRS penalty abatement, which can get part or all the penalties removed.
Can the IRS Interest Be Reduced or Removed?
I’m frequently asked whether the IRS interest can be reduced or removed. The theoretical answer is yes. The practical answer is no.
Unlike penalties, IRS interest cannot be reduced or removed (“abated” in legal jargon) for reasonable cause. Reasonable cause is the legal standard for penalty abatements. For interest, it can only be abated if:
- The interest is excessive, illegal, wrongful, or assessed after the statute of limitations expires.
- If the interest accrued results from a math error on a return.
- If there’s an unreasonable delay or an error by the IRS.
- If the IRS doesn’t timely notify you of a proposed liability.
There are other circumstances that may call for the abatement of interest. But practically speaking, interest is rarely abated.
What If I Still Want to Pursue an IRS Interest Abatement?
If you think you qualify for a circumstance that qualifies for an IRS interest abatement, you must file Form 843, Request for Abatement. The likelihood of success on an interest abatement isn’t high, but it may be worth pursuing if there are egregious circumstances and the amount at stake is high. But since the IRS interest rate is reasonable, there is rarely a scenario where this plays out.
If I Make Small Payments, Will They Just Go to the Interest?
Many people will make small payments to repay their IRS debt, and it seems like the balance never goes down. The bad news is that interest almost never stops accruing—evening when you’re making payments towards the liability. The good news is the IRS applies payments to the tax first, then the penalties, then the interest. So those payments you’re making are paying the tax down, even if slowly.
Owe Money to the IRS? Our New Jersey IRS Tax Lawyers Can Help.
If you owe money to the IRS, we can help you explore options: IRS payment plans, IRS offers in compromise, penalty abatements, innocent spouse, and others. Hiring a tax attorney can be an intimating process if you haven’t dealt with them before. We try to make the process easy and painless. Contact us for a free consultation.