What Is IRS Notice 433?
IRS Notice 433, also known as Interest and Penalty Information, is a crucial document issued by the Internal Revenue Service (IRS). It serves to outline the interest rates applied to both overpaid and underpaid taxes, including the underpayment of estimated taxes. These rates can fluctuate but generally fall in the range of 4% to 10%.
The IRS is mandated by federal law to reassess interest rates on a quarterly basis, with interest typically compounded daily, except in cases of late or underpaid estimated taxes.
Key Takeaways:
- IRS Notice 433 details the interest rates applicable to overpaid and underpaid taxes.
- Underpayment of estimated taxes is also covered in IRS Notice 433.
- Failure to meet tax obligations can result in accruing interest until the outstanding amount is settled in full.
Understanding IRS Notice 433
Noncompliance with personal or business tax obligations can lead to significant costs, including interest charges imposed by the IRS until full payment is made. Late filing incurs additional penalties, along with late payment fees. Taxpayers have the option to challenge interest assessments in specific circumstances, such as in cases of mathematical errors or erroneous guidance from the IRS.
IRS Interest and Penalties
The IRS has specified rates for overpayments and underpayments, especially for the fourth quarter of 2021. These rates include 3% for overpayments (but 2% for corporations), 0.5% for portions of corporate overpayments exceeding $10,000, 3% for underpayments, and 5% for significant corporate underpayments.
As per the Internal Revenue Code, interest rates are determined quarterly. For individuals and entities other than corporations, the interest rate is the federal short-term rate plus three percentage points.
The IRS imposes penalties on underpaying taxpayers. Exceptions may apply, such as owing less than $1,000 in tax after considering withholding and credits, or having paid at least 90% of the current year’s tax or 100% of the prior year’s tax shown on the return, whichever is lower. Special rules are applicable to specific categories of taxpayers, as outlined by the IRS.
Failure to file returns results in additional penalties calculated at 5% of the unpaid tax bill monthly, while nonpayment incurs an additional 0.5% each month. Frauds involving tax returns result in a late filing penalty of 15% of the unreported tax amount per month. However, penalties may be mitigated or eliminated by presenting a valid reason or providing evidence of erroneous advice through Form 843, Claim for Refund, and Request for Abatement.