New Formula Needed To Calculate Interest Rate on Unpaid Taxes

The recent volatility in market interest rates prompted GAO to review the interest rate that the Internal Revenue Service (IRS) assesses on delinquent taxes and pays on overpayments.

The formula which IRS presently uses to calculate the interest rate on unpaid taxes fails to properly reflect the government's costs for credit administration and its cost for borrowing money. GAO estimates that, in fiscal year (FY) 1979, the present formula deprived the government of about $286 million in interest charges. This loss occurred because the interest rate did not properly reflect administrative costs and the rising cost of federal borrowing. Conversely, in a period where the cost of federal borrowing is declining, the present formula could also cause interest to be overassessed to delinquent taxpayers. GAO found that the present interest rate formula does not provide for adjusting the interest rate frequently enough or encourage taxpayers to pay taxes promptly in all instances. The formula should be changed so that the government is compensated for costs related to unpaid taxes. Adjusting the interest rate semiannually, using the 1-year Treasury bill rate, and redetermining the overhead factor annually would keep the interest rate more in line with the government's cost of unpaid taxes. The assessed interest of IRS is generally lower than the rate available in commercial money markets. The present interest formula provides for rounding the calculated interest rate to a whole percentage. This procedure cost the government at least $45 million in FY 1979.

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