Procrastination Pays Off for Some Last-Minute Tax Filers
The bonus may not be worth the wait for cash-strapped taxpayers
This tax season, the IRS gave a rare gift to procrastinators: interest earnings on refunds paid out after April 15.
Usually, the IRS only pays interest on refunds that remain unprocessed 45 or more days after the tax-filing deadline. This year, the IRS will pay interest on refunds that were not paid out as of April 15—even though it moved the tax-filing deadline to July 15—meaning last-minute filers automatically qualified for delayed-refund interest.
- Every taxpayer due a refund who did not receive their refund by April 15 and filed by the July 15 deadline will receive interest on that amount
- Interest is calculated from April 15 to the date the refund is issued
- The IRS is paying higher interest rates than current high-interest savings accounts and short-term CDs
- People who filed paper returns are more likely to receive an interest payment, because of how long they take to process
On delayed refunds, the IRS will pay taxpayers an interest rate of 5% per year, compounded daily, for the second quarter ending June 30, and 3% for the third quarter ending Sept. 30. These rates are higher than what most would receive in a short-term CD or high-yield savings account.
While a delayed refund means getting a little bonus by way of interest, that may be little comfort during a period of record unemployment, when refunds could provide some taxpayers with additional cash.
“I think most people would rather have the money sooner, especially if [they’re] without a job or down to a one-income family because someone lost their job,” Henry Grzes, lead manager for tax practice & ethics for the American Institute of Certified Public Accountants (AICPA), told The Balance in a phone interview. “Bills, unfortunately, don’t stop coming due.”
There’s no way to figure out exactly when someone will receive their refund, particularly for those filing paper returns rather than electronic. (And interest payments may come separately from the refund.) The best way to track a refund status is the IRS’ “Where’s My Refund?” tool.
Not receiving interest because a taxpayer filed on time and received their refund before April 15 isn’t necessarily a penalty.
“It’s the same thing as putting your money in a checking account that pays no interest versus a savings account that pays interest,” Grzes said. Either way, interest received from the IRS on a refund is taxable on the 2020 return that taxpayers will file in 2021. “It’s an income event for the taxpayer because they paid into the return by withholding from their paycheck or overpaying, so the overpayment is basically just returning to you money that you had given to them,” Grzes said.
The average refund received thus far for 2019 tax returns was $2,762, as of July 10.
Why This Year Is Different
This year’s July 15 filing date was considered a disaster postponement of the deadline.
“Where a disaster related postponement exists, the IRS is required by law to pay interest calculated from the original April 15 filing deadline as long as they file a tax return by the postponement deadline,” an IRS spokesperson told The Balance in a phone interview.
There have been disaster declarations in the past, such as from hurricanes, but those were limited to taxpayers in areas designated as disaster zones by the Federal Emergency Management Agency (FEMA). This year’s postponement resulting from the coronavirus pandemic is a rare situation that affects the entire nation.
“This is the first time the IRS has extended the deadline this long, and with coronavirus, they wanted to give people time to file and pay,” Lisa Lewis, TurboTax CPA and tax expert, said in a phone interview with The Balance.
Taxpayers owed a refund receive interest if that refund is paid after the original April 15 filing date, and the taxpayer will receive interest that’s calculated from April 15. Taxpayers who filed by the July 15 deadline—along with those who filed prior to April 15 but received their refunds after April 15—will receive interest.
The IRS Backlog Adds to Delays
Even if a taxpayer filed their return before April 15, they may still receive interest, particularly if they filed a paper return. Paper returns undergo a more involved manual process, and the IRS scaled back operations during the coronavirus pandemic.
The IRS requests that people who are owed refunds and filing paper returns mail them directly to an IRS facility where relevant lines are marked so data transcribers can manually enter the data into the system. Since this is a manual process, it takes longer and, unfortunately, there has always been a backlog.
“They haven’t adopted any type of optical scanning which would process claims faster—it’s a real challenge,” Grzes said.
As of July 10, 2020 (the most recent data available), the IRS had received 147,142,000 returns, and about 13,968,000, or 9.5%, were paper returns. On June 30, the IRS had an estimated backlog of 12.3 million paper tax returns or correspondence as of mid-June, and as of July 10, there were 12.5 million tax returns that had not yet been processed.
“The IRS has a pretty serious backlog and they are working hard to catch up,” Cindy Hockenberry, an enrolled agent and director of tax research and government relations at the National Association of Tax Professionals (NATP), said in an email to The Balance. “They only recently started processing paper returns. They have been processing e-filed returns all along, but with fewer staff, it’s taking longer than usual.”
IRS. "Interest for Individuals." Accessed July 22, 2020.
IRS. "IRS Statement on Interest Payments." Accessed. July 22, 2020.
IRS. "Filing Season Statistics for Week Ending July 10, 2020." Accessed July 22, 2020.
C-SPAN. "Senate Hearing on COVID-19 and the IRS." Accessed July 22, 2020.