IRS Notice 433 - Interest and Penalty Information

IRS Notice 433 - Interest and Penalty Information is a document published by the Internal Revenue Service that outlines the interest rate applied to overpaid or underpaid taxes, as well as the interest rate applied to the underpayment of estimated taxes. The interest rate can vary from time period to time period, but typically ranges from 4-10%. Federal law requires the IRS to determine the interest rate on a quarterly basis, and interest is typically compounded daily (except on late or underpaid estimated taxes).

Underpaying personal or business taxes can cost you, and the IRS will continue to charge interest until the amount owed is paid in full. Taxpayers are also subject to a late filing fee for missing the filing deadline, as well as a late payment fee. Taxpayers are allowed to appeal interest in certain circumstances, such as mathematical errors and bad advice from the IRS.

The rate for overpayments and underpayments varied in 2018: It was 4% for overpayments and 3% in the case of a corporation; 1.5% for the portion of a corporate overpayment exceeding $10,000; 4% for underpayments; and 6% for large corporate underpayments, according to the IRS.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. 

The agency has penalties as well for underpayers. "Most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers," the IRS stated.

In general, failure to file your return will cost an additional 5% of your unpaid tax bill each month, and not paying what you owe tacks an extra 0.5% each month to your overall IRS debt. If the agency deems there's fraud involved, the penalty for filing late is 15% of the amount of tax you should have reported on your tax return for each additional month or part of a month you didn’t file your return.

But the agency also will look at your dog-ate-my-return note.  The law lets the IRS remove or reduce penalties if the taxpayer can supply an acceptable reason or if you received erroneous written advice from the agency. You'll need to file Form 843, Claim for Refund and Request
for Abatement.