Interest payments are a part of almost every person's life. If you carry a credit card balance, you pay interest on it. If you have a mortgage, interest is probably the largest (but, for now, still tax-deductible) part of your monthly payment.
And if you don't pay all the federal tax you owe on time, interest adds to you total U.S. Treasury bill.
But with taxes, the reverse also is true. When the Internal Revenue Service is slow in getting your overpayment processed, your refund will include interest payments to you.
And right now, due to the millions of backlogged returns, the Internal Revenue Service is paying a lot of interest to taxpayers. A whole lot of interest. Like $3.3 billion in interest.
"It's not a small amount of money," Jessica Lucas-Judy, director of tax issues at the Government Accountability Office (GAO), told the Wall Street Journal. Massive props to Lucas-Judy for her impressive understatement skill.
IRS backlogs mean interest added: That $3.3 billion is more than triple the interest paid in 2015, according to a GAO report.
Interest payments generally kick in for those awaiting refunds when the IRS takes longer than 45 days to process a tax return and pay a refund. And if the IRS doesn't make major progress, and soon, in dispensing with the returns that stacked up during the height of the COVID-19 pandemic, the interest payments will be larger.
IRS interest rates are adjusted (or not, depending on economic considerations) each quarter. In April, the rate for delayed individual refund amounts went from 3 percent to 4 percent.
UPDATE, May 20, 2022: The IRS today announced that interest rates will increase for the calendar quarter beginning July 1, 2022. On that date, the rate for individual taxpayers late payments and slow refunds from the IRS will go to 5 percent.
As of April 29, the IRS has 9.6 million unprocessed individual tax returns, some from tax year 2020 and some from 2021 according to the WSJ story by Richard Rubin. Rubin notes that while the agency says it hopes to catch up on all its processing backlog by the end of this year, IRS personnel currently are taking more than 20 weeks to handle amended tax returns.
While any amount added to your refund is welcome whenever you get it, remember that the interest is taxable income. Don't worry. The IRS won't let you forget. It will send you a 1099-INT with the amount it paid you and that you have to report on your return for the tax year you received it.
More in Shout Outs: If you're one of those awaiting a refund from either tax year, I hope you get your interest-added refund soon.
And, regardless of your filing or refund status, if you're interested in the whys, hows, and whats of this unfortunate delayed IRS refund situation, check out this weekend's dual Saturday Shout Outs.
The first one goes to the April 2022 GAO report, "2021 Performance Underscores Need for IRS to Address Persistent Challenges."
The second is to Rubin's WSJ article, "IRS Has Millions of Delayed Tax Returns, and Is Paying Billions in Interest to Those Waiting."
You also might find these items of interest:
- 6 things that could delay your tax refund
- Treasury, IRS seek public input for 2022-23 Priority Guidance Plan
- IRS plans to end tax backlog by shifting jobs, hiring 10,000 new staff
- GOP lawmakers still awaiting IRS answers on last summer's taxpayer data breach