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IRS Installment Agreements are Palatable in the Current Economic Climate

The Internal Revenue Service announced that interest rates for the calendar quarter beginning January 1, 2012 will be the following:

  • 3 percent for overpayments [2 percent in the case of a corporation];
  • 3 percent for underpayments;
  • 5 percent for large corporate underpayments; and
  • 0.5 percent for the portion of a corporate overpayment exceeding $10,000.

The 3 percent rate will apply to estimated tax underpayments for the first calendar quarter in 2012 and for the first 15 days in April 2012.

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 rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus 0.5 of a percentage point.

The interest rates are computed from the federal short-term rate during October 2011 to take effect November 1, 2011, based on daily compounding.

This is good news for taxpayers in IRS installment agreements as the rates for underpayments continue to remain at historic lows.  To place into historical perspective, on June 30 2008, the rate for an underpayment on individual taxpayers was 6 percent.  While tax interest and penalties continue to accrue during an installment agreement, making IRS payment plans difficult, the low rates make an installment agreement palatable.

Revenue Ruling 2011-32, announcing the rates of interest,  will appear in Internal Revenue Bulletin No. 2011-52, dated December 27, 2011.