The Internal Revenue Service recently announced that interest rates will increase for the calendar quarter beginning Jan. 1, 2023.
For individuals, the rate for overpayments and underpayments will be 7% per year, compounded daily, up from 6% for the quarter that began on October 1, according to a news release. Here is a complete list of the new rates:
- 7% for overpayments (payments made more than the amount owed), and 6% for corporations.
- 4.5% for the portion of a corporate overpayment exceeding $10,000.
- 7% for underpayments. (taxes owed but not fully paid)
- 9% for large corporate underpayments.
Under the Internal Revenue Code, the rate of interest is determined quarterly. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 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 one-half (0.5) of a percentage point.
The interest rates announced are computed from the federal short-term rate determined during October 2022. See the revenue ruling for details.
Revenue Ruling 2022-23 announcing the interest rates will appear in Internal Revenue Bulletin 2022-51, dated Dec. 19, 2022.
Wading through a pile of statements, receipts, and other financial documents when it’s time to prepare a tax return can be frustrating for people who haven’t managed their records. By knowing what they need to keep and how long to keep it, people can develop a good recordkeeping system year-round and make filing their returns easier.
Good Records Help
Good recordkeeping can also help taxpayers understand their situation when they receive letters or notices from the IRS.
- Identify sources of income. Taxpayers may receive money or property from a variety of sources. The records can identify the sources of income and help separate businesses from non-business income and taxable from nontaxable income.
- Keep track of expenses. Taxpayers can use records to identify expenses for which they can claim a deduction. This will help determine whether to itemize deductions at filing. It may also help them discover potentially overlooked deductions or credits.
- Prepare tax returns. Good records help taxpayers file their tax returns quickly and accurately. Throughout the year, they should add tax records to their files as they receive them to make preparing a tax return easier.
- Support items reported on tax returns. Well-organized records make it easier to prepare a tax return and help provide answers if the return is selected for examination or if the taxpayer receives an IRS notice.
In general, taxpayers should keep records for three years from the date they filed the tax return. Taxpayers should develop a system that keeps all their essential information together. They can use a software program for electronic recordkeeping. They could also store paper documents in labeled folders.
Records to Keep Include
- Tax-related records. This includes wage and earning statements from all employers or payers including payment apps or cards, such as Form W-2, 1099-K, 1099-Misc, and 1099-NEC. Other records include interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents, and records of virtual currency transactions. Taxpayers should also keep receipts, canceled checks, and other documents that support income, a deduction, or credit reported on their tax returns.
- IRS letters, notices, and prior year tax returns. Taxpayers should keep copies of prior year tax returns and notes or letters they receive from the IRS. These include adjustment notices when an action takes place occurs on the taxpayer’s account.
- Property records. Taxpayers should also keep records relating to property they dispose of or sell. They must keep these records to figure out their basis for computing gain or loss.
- Business income and expenses. Business taxpayers should find a bookkeeping method that clearly and accurately reflects their gross income and expenses. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
- Health insurance. Taxpayers should keep records of their own and their family members’ healthcare insurance coverage. If they’re claiming the premium tax credit, they’ll need information about any advance credit payments received through the Health Insurance Marketplace and the premiums they paid.