Interest on Underpayments refers to the penalty interest charged by tax authorities when a taxpayer fails to pay the full amount of tax owed by the due date. This interest accrues on the unpaid balance from the original due date until the tax is paid in full.
The rate of interest is typically set by the tax authority and may vary based on prevailing market rates. For instance, the IRS charges interest on underpayments of federal income tax, which is compounded daily. Taxpayers are generally notified of this interest through their tax statements and may face additional penalties if the underpayment is significant or if it results from negligence.
For example, if a taxpayer owes $1,000 in tax and only pays $800 by the due date, the remaining $200 will incur interest on underpayments until it is settled. If the interest rate is 5% per annum, the taxpayer will owe additional interest on that $200 until the balance is fully paid.
« Back to Glossary Index