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 there is a little more to this statement that may slightly alleviate the pain for millions of tax filers who have faced months of delays in getting their federal tax refund.
This comes by the way of tax refund interest payments made by the IRS which will start to be paid 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 ongoing delays in the IRS processing tax refunds beyond normal processing timelines.
By law the IRS is required to accrue and make refund interest payments 45 days after receipt of an accepted tax return, calculated from the tax season deadline (April 18th this year). The long-standing 45-day rule provision is to allow the IRS time to process returns for filings that come in around the deadline.
The calculation for this interest payment is based on adjustable rates per IRS AFR page, where the current interest rate for delayed refunds is 4 percent. This is updated quarterly.
So for a $1000 refund you would get around $3.33 of interest for every month (or $40 per annum) your refund is delayed for 45 days or more beyond the tax season filing deadline.
Given the average refund is around $3,000 this would be equivalent to $120 for the year or $10 p/month.
Early filers and those who got their refund payments before the official end of the tax season, are however out of luck and won’t be getting this payment! The late interest payments only start 45 days after the tax season deadline.
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 refund interest payment (since it is extra income for you) 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 to IRS news releases the agency has sent over $3 billion in interest payments to over 16 million individual tax payers who filed their prior year tax returns on time and were due a refund payment.
With millions still waiting for their 2020 and 2021 tax returns to be processed, I expect IRS interest payments to significantly increase in the coming year.
While the refund delay interest amount was not massive, averaging around $18 to $20 for most tax payers, it was a nice little bonus when many families are short on cash.
When will I get this payment? 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 are getting) your refund.