Is Your Tax Refund Late? IRS Will Pay You Interest.
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Here's your money briefing for Friday, June 26th. I'm J.R. Whalen for The Wall Street Journal. If you're expecting an income tax refund, you should also be on the lookout for a little bonus from the IRS this year, an interest payment.
People who filed in February and got a refund in May will get interest for that month between April and May. People who haven't filed, people who file in July and get a refund... will essentially get three or more months of interest from the IRS on that amount.
Plus, we're less than three weeks away from the delayed tax filing date of July 15th. Could that deadline be pushed back again? Our tax reporter Richard Rubin has been checking up on that.
What bonus interest will the IRS pay if your tax refund is late?
He'll join us after the break.
If you're late in paying a tax bill with the IRS, they charge you interest. But if they're late in getting you a refund, you're the one getting paid. This year, with the tax filing deadline getting pushed back, that could mean a lot more Americans collecting interest. Tax reporter Richard Rubin joins us to explain. So, Richard, is it common for the IRS to pay taxpayers interest on delayed refunds?
Yes, it's actually the law. The normal way it works is they've got 45 days after April 15th to get the refund to you. And then after that, they owe interest to you for being late. That's the normal way it works. It's just this year where that system is working in a bit of a funky way.
Now, the IRS is paying interest on refunds for taxpayers who haven't even filed yet. Is that some sort of a policy change?
No, it's actually the way that the law works because of how they delayed the tax filing deadline. So the law they used to delay the tax filing deadline is one that was written for disasters. Normally thought to think like natural disasters, hurricanes, tornadoes, that kind of thing to give people extra time to file. And that law very specifically spells out, and I hadn't noticed this until I started reporting on it this week and the IRS made a little mention of it, is that this is the way it works. That the 45-day period, that grace period for the IRS to get you a refund doesn't exist during a disaster. And the interest starts accruing right at April 15th. No matter when you file. So people who filed in February and got a refund in May will get interest for that month between April and May.
People who haven't filed, people who file in July and get a refund will essentially get three or more months of interest from the IRS on that amount. By the way, what's the interest rate the IRS pays out? So it's actually a pretty good interest rate, which, you know, conversely, is a pretty bad interest rate if you're on the flip side of this and you owe them money. But for the second quarter, the quarter ending in June, it's 5% annual interest rate compounded daily. And for the third quarter, starting July 1st, it's 3%. It's basically set amounts above specified treasury rates. So there's a formula on how they calculate it, and it changes every quarter. And, you know, obviously, like no one's getting 5% on bank interest.
So it's actually a quite good deal for probably not that much money for most people, but still a quite good deal to have the IRS hang on to your money as long as possible this year. Is this interest taxable? Yes, it is taxable income. So you may get the interest payment from the IRS, and then you may later get a 1099 from the IRS, which will tell you how much money the IRS gave you so you can give some of it back to the IRS.
Uncle Sam's never that far behind, is he?
No, I mean, it'll be X number of months behind. So it'll come, you know, this will be part of your 2020 tax return that we have to pay income taxes on that refund.
How much of this has to do with the backlog of paperwork at the IRS we've heard about?
Some of it. There are definitely some refunds that are delayed because of the backlog of paperwork, processing documentation. Most electronic returns are still going through just the way they normally would, but some are taking longer than usual. So, for sure, in a lot of cases, and this doesn't apply to the stimulus payments, this is just your 2019 refunds, you're a byproduct of the IRS being behind on stuff because so many of the IRS employees have been, were out of their buildings for a long time or are still out of their buildings.
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