I am sure you have heard the old adage that by getting a tax refund you’re giving an interest free loan to the IRS. Well this time it looks like that won’t hold as the IRS is actually going to pay interest on refunds paid in the past three months or those yet to be paid. As a result they will be issuing millions of tax refund interest payments over the next few months. Now before you think the IRS has become a benevolent organization, let me dispel that thought and confirm that the real reason is due to the COVID related postponement to this year’s tax filing deadlines.
In pandemic or disaster related postponements (like the Coronavirus) the IRS is required, by law, to pay interest, calculated from the original filing deadline (April 15th), as long as an individual files a federal income tax return by the postponed deadline (May 17th, 2021 for the latest tax season). The calculation for this interest payment is complicated, and you need to go to the IRS website for the calculations, but the current interest payment comes to around 3% APY. So for a $1000 refund you would get around $2.50 of interest for every month your refund is delayed beyond April 15th.
Early filers and those who got their refund payments before April 15th, are however out of luck and won’t be getting this payment! Similarly those who filed late or requested an extension for their tax filing (and maybe due a refund) won’t be getting the payment either.
The bad news though is that while you will get these tax refund interest payments for the current year you will have to pay tax on the interest (since it is income) in the following year when you file your tax return. You will get a form 1099-INT from the IRS to for this payment and because they are issuing it, you won’t be able to avoid disclosing it!
According news release 2020-183, in 2019 IRS sent interest payments to over 14 million individual tax payers (business’ are not eligible) who filed their 2019 tax returns on time and were already paid or due a refund in the past three months or are still due their refund payment. While the amount was not massive, it averaged to around $18. A nice little bonus when many families are short on cash. Note that this interest payment will be sent separately to your tax refund payment, but should be paid in the same way you got (or getting) your refund.
Note – there is a long-standing 45-day rule provision which requires the IRS to add interest to refunds on timely-filed refund claims that are issued more than 45 days after the return due date. However while this was not the reason for this interest payment you should keep this mind for future years given delays many people may see based on the 2021 IRS processing schedule.