Some taxpayers who had to wait extra long last year for their 2020 tax year refunds got a bit more than they expected.
Where it took the Internal Revenue Service more than 45 days from the return's due date — which was May 17, 2021 — to issue the refund, the agency had to add interest to the amount it eventually delivered.
This filing season, however, the IRS is looking to get some of those interest payments back. The agency is issuing 1099-INT forms to all taxpayers who got interest of at least $10 added to last year's refunds.
Likely 1099-INT recipients: During 2021, several groups of people could be getting IRS 1099-INT forms.
There are taxpayers who got interest payments on their regular refunds that the agency was slow in delivering due to COVID-19 pandemic processing delays.
Then there are those early filers who got unemployment benefits and whose tax liability had to be recalculated, and refunds issued, after the American Rescue Plan Act excluded some of those 2020 benefits from federal tax.
Earnings level, timing: Ten bucks or more is the same earnings trigger for all reportable interest payments. In most cases, you should have received the 1099-INT, and other statements, by now. They were to be issued by Jan. 31.
However, the IRS notes that because it is dealing with mailing issues and other factors, taxpayers who got interest added to their refunds may continue to see the agency's 1099-INTs arrive via the U.S. Postal Service through February.
The main thing here, as with all types of third-party tax reporting documents, is not to ignore them. These statements are copied to the IRS and it's how Uncle Sam's tax collector verifies what you report on your Form 1040.
Discrepancies between your return and 1099 amounts will get you another, more unwelcome notice that could result in you owing the IRS interest on underpaid 2021 taxes.
Yeah, it doesn't seem quite right that you owe on what the IRS paid you for its delay. But, under the law, interest income is taxable, and that includes payments from the IRS. Hey, that's why we have the well-known saying that taxes, like life, aren't always fair.
And technically, even if you got less than $10 in interest on your late refund, you still should report the amount. Just because you didn't get an official form for the $9.99 or less, doesn't mean the money is tax free.
Interest calculations: The IRS hasn't said how much in interest it paid on late refunds. Those numbers will be tallied later. But given that the agency's return processing backlog due to the last couple of years of COVID-19 precautions was in the millions, it could be a hefty sum.
Every year, the agency ends up paying interest to taxpayers. For fiscal year 2019, it shelled out $2.1 billion in interest on refunds. During FY 2020, the latest year with complete data in the IRS' Statistics of Income report and which covered the start of the coronavirus pandemic and its effects on tax filing, the agency paid out $3.1 billion extra in interest.
But don't be fooled by those billions. That interest amount was spread among refunds issued to all types of taxpayers: individual, business, estate and trust, gift, excise, and employment tax refunds.
On an individual basis, which is what concerns most of the ol' blog's readers, the IRS interest rate hovered around 3 percent last year. Using the 2021 average refund amount of $2,815 as an example, the interest at that annual percentage yield, or APY, comes to $7 for every month the refund is delayed beyond the tax season filing deadline.
If you got more than the average refund amount, or it took the IRS several months to get you the refund, be on the lookout for the agency's 1099-INT.
You also might find these items of interest:
- The many versions of IRS Form 1099
- Tax statements you need to file your 2021 return
- Report all your income even if you don't get a 1099
- More forms and more on them in Talking Tax Forms