This might be a naive question! I was just preparing my 1040-ES, and it occurred to me that with treasury rates so high at the moment, it might be worth just keeping it and paying the penalty instead.
The problem is, AFAIK the penalty rates for 2023 (form 2210) have not been announced yet so I'm just guessing they will be similar to this years... is that likely?
Am I playing a dangerous game just to save a few pennies? :)
Tavis.
According to Tavis Ormandy snipped-for-privacy@gmail.com:
The current rate is 0.5%/mo or 6%/yr. Even with recent tightening, that is still more than what you can get on CDs or T-bills or other liquid investments. The IRS is not totally stupid so I would expact them to raise the rate to make sure paying late is still unattractive.
Yup, although I would argue with the word "save" here.
The current IRS penalty/interest rate is 7%. It increased at the beginning of 2023. The rate is determined by adding 3% to the federal short-term interest rate rounded to the nearest full percentage. §6621(a)(1) All the details can be found in the IRB each quarter. See for instance
Ira Smilovitz, EA Leonia, NJ
Ah-ha, that makes sense - of course they've thought of this. Well, so much for that idea :)
Thank you, very interesting.
Tavis.
The ES Penalty is computed as simple interest, currently 7% annual, from the due date of the estimated tax payment until the earlier of the date paid or the due date of the return. So, as much as 7% of the estimated payment due this week, more if the rate goes up later in the year. Prevailing rates, shorter terms for subsequent estimated payment due dates. Can you make that much short-term? And then there's that ethical issue of being in full compliance with tax filing and paying requirements.
The one exception that was paying pretty good rates the last couple of years is Treasury I-Bonds which are pegged to inflation and currently pay 6.89% through April 30. During the prior six-months, the were paying 9.62%. You have to keep the bonds a minimum of 12 months and if you cash them in before five years you lose a quarter's interest. During the 12-month period when the rates were 9.62% for 6-months and 6.89% for 6-months, you MIGHT have gotten a small advantage in delaying IRS payment, as the blended rate even with the penalty was 6.53%, which is more than the IRS penalty. But with inflation dropping, the I-Bond rate will drop to 3.79% after April 30th, so that will no longer be that good an alternative.
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When I first started practicing the IRS interest rate was enshrined in statute. So whether the actual interest rate was higher or lower than the IRS rate, it allowed all sorts of opportunities. Congress saw that was happening and act to stop it. I think that much of tax law is really just Congress playing wack-a-mole with different approaches that have been used to take advantages of loopholes in the system.
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