When Does the IRS Pay Interest on Refunds?

Taxpayers eagerly anticipate refunds, but delays can occur. In certain cases, the IRS compensates for these delays by paying interest on refund amounts. This ensures taxpayers are not financially disadvantaged due to processing times that exceed a reasonable limit.

When Interest on Refunds Applies

The IRS must pay interest on tax refunds under specific conditions. According to the Internal Revenue Code (IRC) Section 6611, interest applies if the IRS does not issue a refund within 45 days of either the tax return’s due date or the date it was filed, whichever comes later. For early filers, the 45-day window starts from the filing deadline, typically April 15th.

Interest accrual applies to both individuals and businesses. For example, if a corporation files its return by the deadline and the IRS delays the refund beyond the 45-day timeframe, interest is added to the refund. This policy ensures fair treatment across all taxpayer categories.

The interest rate is determined quarterly and is based on the federal short-term rate plus three percentage points. This quarterly adjustment reflects changes in economic conditions. For instance, if the federal short-term rate is 1%, the refund interest rate would be 4%.

Timelines for Interest Accrual

The timeline for interest accrual depends on key dates. For individuals, the 45-day period starts from the later of two dates: the tax return’s due date or its actual filing date. If a taxpayer files after April 15th, the IRS has 45 days from the filing date to process the refund without incurring interest. For early filers, the countdown begins on April 15th.

For businesses, the timeline follows the same principle, starting from the later of the due date or the filing date. Although corporate filings can be more complex and take longer to process, the 45-day rule still applies.

How Interest Is Calculated

Interest on delayed refunds is calculated using a specific methodology. The rate is derived from the federal short-term rate, adjusted quarterly, with three percentage points added. For example, if the federal short-term rate is 2%, the refund interest rate would be 5%.

Interest accrues daily, ensuring taxpayers are compensated for each day beyond the 45-day window. For example, at a 5% annual interest rate, the daily accrual is applied to the refund amount, increasing the total paid as the delay continues.

Receiving the Interest

When taxpayers receive their refund, any applicable interest is listed as a separate line item. This transparency allows taxpayers to clearly identify the compensation for processing delays. The interest amount is included with the refund, whether it’s issued via direct deposit or check, depending on the taxpayer’s original refund preference.

It’s important to note that interest on refunds is considered taxable income. If the interest payment is $10 or more, the IRS issues Form 1099-INT, which taxpayers must report on their returns to comply with federal tax requirements.

Reporting Interest on Your Return

Interest received on IRS refunds must be reported as taxable income for the year it was received. Failure to include this income can result in discrepancies on the taxpayer’s return. Taxpayers who receive $10 or more in interest will be issued Form 1099-INT, detailing the payment amount.

On Form 1040, taxpayers should input the interest amount on the designated line for taxable interest income. Tax preparation software typically prompts users to enter details from Form 1099-INT, but those filing manually should carefully review their entries to avoid mistakes.

Even if the interest payment is less than $10 and no Form 1099-INT is issued, taxpayers are still required to report the income. This is particularly relevant for those with multiple small interest payments from various sources, as the combined total could affect taxable income. Maintaining accurate records and reviewing refund documentation ensures compliance with reporting obligations.