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December 16, 2022

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IRS Announces New Underpayment Interest Rates for 2023—What To Know If You Cannot Afford to Pay What You Owe

Under the Internal Revenue Code (IRC), interest on unpaid taxes begins to accrue immediately. When taxpayers incur penalties for failure to pay or failure to file, these penalties begin to accrue interest promptly as well.

New Underpayment Interest Rates for Federal Taxes and Penalties (Effective January 1, 2023)

The Internal Revenue Service (IRS) periodically adjusts the interest rates for unpaid taxes and penalties, and it has recently increased the interest rates for 2023. Beginning January 1, 2023, the interest rates for tax and penalty underpayments will be:

  • Seven percent (7%) for underpayments other than “large corporate underpayments”
  • Nine percent (9%) for “large corporate underpayments”

“Large corporate underpayment” is defined in Section 6621(c)(3)(A) of the IRC. Under this provision, a “large corporate underpayment” is “any underpayment of a tax by a C corporation for any taxable period if the amount of such underpayment for such period exceeds $100,000.” For corporate income taxes, a “taxable period” is generally the relevant tax year. For other corporate taxes, the relevant “taxable period” for determining the relevant interest rate is “the period to which the underpayment relates.”

Individual and Corporate Taxpayers’ Options When They Cannot Afford to Pay What They Owe

As a general rule, individual and corporate taxpayers need to pay what they owe the IRS. But, as is the case with many provisions of the IRC, some exceptions apply. If you are facing (or if your company is facing) unmanageable liability for taxes, interest and penalties, what options do you have available?

Depending on the circumstances, individual and corporate taxpayers’ options for reducing or eliminating their outstanding liability to the IRS may include:

File an Amended Return

As the IRS explains, “[i]f you’re able to reduce the amount of the tax or penalties you owe by filing an amended return . . . we’ll automatically reduce the related interest.” Individual and corporate taxpayers may have various justifications for filing an amended return that reduces their tax burden, including (but not limited to):

  • Changing the taxpayer’s filing status
  • Claiming additional credits or exemptions
  • Claiming additional itemized deductions
  • Claiming additional dependents
  • Correcting errors or omissions in a previously filed return

Note, however, that if you file an amended return that substantially reduces your (or your company’s) tax liability, this may lead to scrutiny from the IRS. When filing an amended return to reduce your tax liability, you must of course comply with all applicable provisions of the IRC, and you must address any filing errors that resulted in underreporting of your (or your company’s) tax liability as well. Reducing a taxpayer’s tax liability through an amended filing without adequate substantiation presents a high risk of triggering an IRS audit, and if revenue agents determine that an amended return is fraudulent or evasive in any respect, this could have the opposite effect of increasing the taxpayer’s liability.

Submit an Offer in Compromise

For taxpayers that cannot reduce their liability by filing an amended return, an alternative may be to submit an offer in compromise to the IRS. Submitting a successful offer in compromise affords the opportunity to settle tax debt for less than the full amount owed.

The IRS considers four primary factors when deciding whether to accept, reject or negotiate an offer in compromise: (i) ability to pay, (ii) income, (iii) expenses and (iv) asset equity. The agency’s goal in assessing these factors is to assess whether the taxpayer is truly unable to pay the taxes, interest and penalties owed. Taxpayers that submit offers in compromise must meet various eligibility criteria as well—including submitting an initial payment with their offer.

Apply for Interest Abatement  

Interest abatement is a limited remedy that allows taxpayers to avoid liability for interest only. As the IRS explains, this remedy is available when interest has been applied “because of an IRS officer or employee’s unreasonable error or delay.” Abatement is available for interest imposed on income, estate, gift and certain excise taxes—it is not available for interest imposed on employment taxes. Taxpayers seeking interest abatement must file within three years of the relevant return filing date or two years from the payment date of the relevant tax, whichever is later.

Apply for Penalty Relief

For taxpayers that owe interest on penalties, another potential option for reducing their liability to the IRS is to file for penalty relief. The IRS offers relief from the following penalties in appropriate cases:

  • Accuracy-related penalties
  • Failure to deposit employment taxes
  • Failure to file tax returns
  • Failure to file information returns
  • Failure to pay taxes
  • Penalties imposed due to dishonored checks
  • Underpayment of estimated tax liability

Individual and corporate taxpayers seeking penalty relief must do so either under one of the IRS’ three general penalty relief programs or under a program established temporarily for a specific purpose (i.e., the IRS’ COVID-19 Penalty Relief program). The IRS’ three general penalty relief programs are:

  • First-Time Penalty Abatement and Administrative Waiver
  • Reasonable Cause and Good Faith
  • Statutory Exceptions Eligible for Relief

File an Appeal with the IRS’ Independent Office of Appeals

For individual and corporate taxpayers that are facing interest liability in relation to disputed tax liability, the best option may be to file an appeal with the IRS’ Independent Office of Appeals. The Independent Office of Appeals is taxpayers’ first option for seeking to resolve tax controversies in most cases.

If the Independent Office of Appeals rules in favor of a taxpayer resulting in a reduction in the taxpayer’s outstanding tax liability, then any associated interest and penalties will be abated as well. If the Independent Office of Appeals upholds a taxpayer’s liability, the taxpayer can continue to pursue relief in federal court.

Contact Brown Tax, P.C. | Tax Attorneys in Texas

If you would like to know more about your (or your company’s) options for dealing with the IRS, we invite you to get in touch. To schedule an appointment with one of our tax attorneys in Texas, please call 888-870-0025 or tell us how we can help online today.

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