Introduction to IRS Interest

Types of IRS Interest

There are two types of interest that the IRS refers to, underpayment and overpayment interest. Underpayment interest is debit interest and is charged to a taxpayer when tax, penalty, or additions to tax are owed to the Government.  Overpayment interest is credit interest and is paid to the taxpayer by the IRS for an overpayment of tax by the taxpayer.

Different interest rates sometimes apply to the two different types of interest.  IRC §§6601 and 6611 provides the requirements for calculating interest.

Simple IRS Interest

Simple interest is where interest is calculated on the principle amount owed, but not on any interest deriving from the principle amount.

Compound Interest

Compound interest ascribes to interest on both the principle amount owed and any interest accrued on the principle. After January 1, 1983 the IRS calculates interest by daily compounding.

Normal Interest

Normal interest is interest that is calculated without any restrictions.

Restricted Interest

Restricted interest refers to interest that is calculated from other than normal interest start and stop dates.

Annual Interest Netting

Annual interest netting ascribes to a method of calculating interest that equalizes the difference between debit and credit interest.

Net Rate Interest Netting

Net rate interest netting refers to the process of equalizing/eliminating the interest rate differential between overpayments and underpayments for the same taxpayer regarding different tax types.

• IRC §6601(a) states that any tax that is owed and not paid on or before the due date prescribed for such payment accrues interest at the underpayment rate until the tax liability is satisfied.

• IRC §6601(b) provides that an extension of time to file, or an installment agreement, will not extend the time to pay.

• IRC §6611(a) establishes that interest shall be allowed and paid at the overpayment rate for any overpayment of tax.

• IRC §6621 proscribes that interest on both overpayments and underpayments are tied to the adjustable Federal short-term rate.