Interest on Tax not timely paid Taxpayers incur interest expense in four contexts They file late, without having requested an extension, and pay late. They request an extension for filing but inaccurately estimate their tax liability and, thus, must pay some additional tax when they file their return. They file on time but are not financially able to pay some, or all, of their tax liability. Their return is audited, and it is determined that they owe additional taxes. In general, the interest rate for underpayment is three percentage points higher than the federal short-term rate, and the rate for overpayment is two percentage points higher.
Interest is compounded daily.
No penalty if taxpayer can prove they used reasonable cause. Very heavily litigated. In general, individuals should make quarterly estimated tax payments if they have more than a relatively small amount of income from sources other than salary and wages. Penalty for Underpaying Estimated Taxes. Same as above The penalty for each quarter is calculated separately.