Millions of Americans are still waiting for their tax refunds and payment of their tax credits while the IRS tries to process mountains of returns, an odyssey made difficult with little staff and funds.
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However, the wait could be worth it, as the tax agency will put a little more money in the wallets of taxpayers affected by the delay.
The IRS has 45 days after a return is filed to process it and pay a refund, after which the agency has to pay interest. As of April 1, the interest rate for individual taxpayers, which is pegged to Federal Reserve standards, increased from 3% to 4%.
At the average refund of $2,800, that would be an additional $112. Interest is paid quarterly.
But another reason interest payments are increasing: the filing extensions granted by Presidents Donald Trump and Joe Biden in 2020 and 2021, respectively. While taxpayers were allowed to file late, the refund due date was tied to the original tax day, giving the agency even less time to process a return before interest began to accrue.
While most taxpayers will probably be glad to see the extra interest, here's the bad news: The IRS considers those interest payments taxable income. This means that you will collect taxes on them.
Although most reimbursements are processed within 21 days, the agency is in the midst of a budget and staffing crisis. Last year alone, the IRS paid $3.3 billion in interest to taxpayers, according to a report from the Government Accountability Office (GAO). As of March, refund interest payments are down 11% this tax season, but are still higher than in 2019.
GAO revealed that the IRS paid nearly $14 billion in interest over the last 7 fiscal years. Nearly a quarter of that was paid out in 2021 alone when the IRS paid out $3.3 billion in interest, due in large part to the ongoing disruptions and challenges the agency has been experiencing since the pandemic.
“GAO found that some categories of errors occur each year; however, the IRS does not evaluate the underlying causes of taxpayer errors on returns. Doing so could help reduce future errors, refund delays, and strains on IRS resources."
The IRS, in its response, said that its process for analyzing errors is robust and that the amount of interest paid is not a meaningful business measure.
As of April 29, the IRS has 9.6 million unprocessed individual tax returns. The tax agency did not say how many of those returns are at the 45-day mark, but estimates the number includes returns received before 2022.
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