The Internal Revenue Service said Wednesday it would pay interest on late refunds. IRS headquarters in Washington.
Photo: Andrew Harrer/Bloomberg NewsWASHINGTON—Many Americans receiving tax refunds this spring and summer, including some who haven’t even filed their tax returns yet, will receive interest payments from the Internal Revenue Service for late refunds.
Any individual income tax refunds issued after April 15 will be paid with interest, even though the tax-filing deadline has been extended to July 15. That IRS decision, announced Wednesday, stems from a quirk in the tax code and in the way the filing deadline was extended.
The result: Many people who chose to delay filing their tax returns will get a bonus from the government. The IRS, meanwhile, will be paying for the privilege of holding on to the money since April 15—even to taxpayers who haven’t claimed it yet.
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The tax agency didn’t immediately have estimates Wednesday on how many people would be affected or how much money it expected to pay. The IRS issued about 11 million refunds between mid-April and mid-June and continues to process returns.
The IRS charges interest when taxpayers don’t pay on time and it pays interest to taxpayers when the government issues refunds too slowly. When refunds are delayed, the IRS pays interest rates far higher than bank accounts do: 5% compounded daily for the second quarter and 3% compounded daily starting July 1.
Because of the coronavirus pandemic, the IRS extended the typical April 15 deadline to July 15. Officials encouraged taxpayers to file quickly and claim their refunds, but millions are still waiting until closer to the deadline.
Those who followed the advice to file promptly could lose out on potential interest payments while those who waited would benefit. Other taxpayers have been waiting for months for their refunds while the agency’s buildings were closed. They could benefit from interest payments under the IRS decision.
In a typical year, the tax code requires the IRS to start paying interest if a refund is held up for more than 45 days beyond the original tax-filing deadline. Normally, that means refunds issued after the end of May come with interest.
The tax-code section governing interest payments says the 45-day period is determined from the due date without regard to extensions. This year, however, that 45-day rule isn’t in effect and interest started accruing after April 15.
The IRS said the interest payments may arrive separately from tax refunds.
The IRS approach seems fair, and it makes sure to provide interest payments to people who filed early and are still waiting for refunds, said Keith Fogg, who directs the Harvard Law School program that offers tax assistance to low-income households.
“The IRS seems to have chosen a method that is very taxpayer friendly and will not subject it to criticism,” he said. “Hard to fault it for that.”
There is one catch: The interest payments from the IRS will count as taxable income for 2020.
Write to Richard Rubin at richard.rubin@wsj.com
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