Late Payment of Taxes -- Interest

[uppy]

I asked this question elsewhere, but just to simplify and try to get a solid number, if anyone knows:

Is there is a standard interest rate that is charged by the IRS on late payment of income taxes? In this hypothetical situation, I will have filed my income taxes on time, but set up a payment schedule. Therefore there may also be a "late payment penalty." I found various conflicting information online, but I'm just looking for a percentage rate.

Here's a link to the full story if you're interested: https://forum.mrmoneymustache.com/ask-a-mustachian/income-taxsl-problem/

[CommonCents]

http://www.irs.gov/taxtopics/tc653.html

[uppy]

http://www.irs.gov/taxtopics/tc653.html

Here's what the link says: "The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest is compounded daily. If you file a return but don't pay all amounts shown as due on time, you will generally have to pay a late payment penalty of one-half of one percent for each month, or part of a month, up to a maximum of 25%, on the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. For individuals who file by the return due date, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect."

This shit confuses me. So let me get that straight. It's 0.5% per month for the "late payment penalty" -- but 0.25% if I file taxes on time.

Then the interest rate is the "federal short-term rate" (all I could find online said 0.3%) + 3%...So 3.3%??

So my question is how do I calculate the total interest if it is compounded daily? Would it be a 3.55% APR if I file on time?

(note: I'm trying to compare the savings of paying $1k late taxes versus taking out a $2k loan at 7.8%. See link in post above for details.)

[stuckinmn]

I'm no tax lawyer, but i believe if you have filed on time but not paid on time, it is .5% penalty per month or portion of month you have not paid (basically 6% annualized), plus interest which currently would be 3% or thereabouts (fed short term rate is effectively 0, so add 3% to that).  I figure your effective penalty rate would be 9% or slightly higher, so paying the taxes on time is a better return than taking the 7.8% loan.

[CommonCents]

I'm no tax lawyer, but i believe if you have filed on time but not paid on time, it is .5% penalty per month or portion of month you have not paid (basically 6% annualized), plus interest which currently would be 3% or thereabouts (fed short term rate is effectively 0, so add 3% to that).  I figure your effective penalty rate would be 9% or slightly higher, so paying the taxes on time is a better return than taking the 7.8% loan.

Even for tax lawyers it can get confusing.  My federal income tax professor (at a top 10 school, pretty bright), as a young recent grad working I think for the IRS, knew you could request to file late and persuded his wife to do this, thinking he'd get the interest free loan from the govt and could invest the money in the meantime.  Then he had to pay lates fees+interest.  Not a happy wife.

[uppy]

I'm no tax lawyer, but i believe if you have filed on time but not paid on time, it is .5% penalty per month or portion of month you have not paid (basically 6% annualized), plus interest which currently would be 3% or thereabouts (fed short term rate is effectively 0, so add 3% to that).  I figure your effective penalty rate would be 9% or slightly higher, so paying the taxes on time is a better return than taking the 7.8% loan.

Is it penalty "6% annualized" only because the 0.5% X 12 months = 6%? By which I mean, if I paid off the $1k in 6 months, would the total penalty + interest essentially be 6%?

[stuckinmn]

If it was paid off in 6 months it would be total interest of 4.5 (or really 5 since the penalty is on each portion of a month and you would bleed over into a 7 th month) but during that time the total interest on the loan would be 3.9.  You need to annualized both so you are comparing apples to apples.

[dragoncar]

It's too complicated: http://www.irscalculators.com/

[uppy]

Too complicated is right...that calculator told me I would only pay an extra $210 which I find hard to believe.

If it was paid off in 6 months it would be total interest of 4.5 (or really 5 since the penalty is on each portion of a month and you would bleed over into a 7 th month) but during that time the total interest on the loan would be 3.9.  You need to annualized both so you are comparing apples to apples.

Did you take into account the penalty and charges for the installment agreement? If so that is definitely a better deal than the 7.8% interest on the loan.

[dragoncar]

Too complicated is right...that calculator told me I would only pay an extra $210 which I find hard to believe.

If it was paid off in 6 months it would be total interest of 4.5 (or really 5 since the penalty is on each portion of a month and you would bleed over into a 7 th month) but during that time the total interest on the loan would be 3.9.  You need to annualized both so you are comparing apples to apples.

Did you take into account the penalty and charges for the installment agreement? If so that is definitely a better deal than the 7.8% interest on the loan.

I don't get anywhere near $210 with what you posted in the other thread.  What inputs did you use?  Have you looked into setting up a payment plan?

[stuckinmn]

If you have an installment plan your annualized rate would be 6% (3% + .25% penalty fee each month) which on its face seems better than the 7.8.  But the installment plan setup fee screws you- even if it is the lowest fee of 42 that is effectively a 4.2% origination fee on a short term 6% loan of 1,0000 which, assuming you pay it off in 6 months takes your effective annualized rate to 14.4%.   Pay the irs and throw the extra monthly money at the student loan.

[uppy]

dragoncar: I probably just did it wrong.

If you have an installment plan your annualized rate would be 6% (3% + .25% penalty fee each month) which on its face seems better than the 7.8.  But the installment plan setup fee screws you- even if it is the lowest fee of 42 that is effectively a 4.2% origination fee on a short term 6% loan of 1,0000 which, assuming you pay it off in 6 months takes your effective annualized rate to 14.4%.   Pay the irs and throw the extra monthly money at the student loan.

Thank you for figuring that out!