Taxpayers who are waiting for refunds from Uncle Sam may take comfort in knowing that payments to the Internal Revenue Service that are 45 days or more late will receive 4% interest. That’s more than twice the current value of savings accounts and money market funds.
The Internal Revenue Service (IRS) started this year’s tax filing season with an 8 million-return backlog from the previous year. The IRS had more than 15 million unprocessed individual returns from the previous tax year and 2020 as of late April.
After two years of the IRS extending the tax-filing deadline due to the COVID-19 outbreak, Americans may have hurried to submit their forms before the April 18 deadline.
Interest starts to accrue 45 days after the mid-April deadline under the tax rules. That implies the IRS has to pay interest on refunds for times before the returns were officially due during those years when filers were allowed extensions.
According to a new Government Accountability Office investigation, the IRS paid $3.3 billion in interest to tax filers in fiscal 2021, a figure that has more than quadrupled since 2021.
Of course, even a little increase in your refund may not be enough to alleviate the stress of waiting for the check to come.
When asked whether most Americans are aware that the government pays interest on late refunds, Bill Smith, the national director of tax technical services at CBIZ Inc., said, “Probably not.”
Smith, a former tax attorney at the US Department of Justice, told CBS MoneyWatch, “I would say they probably don’t care that much about it because in general, it’s not going to be a significant sum.” “They’ll be pleased if they receive their money from the government sooner.”
“People would want to get their refund sooner rather than later. If you’re expecting $3,000 or $4,000, an additional several hundred dollars won’t help much “Rob Burnette, CEO of Outlook Financial Center in Troy, Ohio, is a financial consultant.
Those that wait longer for their refunds will almost certainly be rewarded with a higher interest rate from the government. The current 4% rate paid to individual filers, which is adjusted quarterly and connected to short-term interest rates, went into effect in April, up a percentage point from the preceding quarter.
It’s expected to grow much more as the Federal Reserve tries to keep inflation in check by raising its primary benchmark interest rate, which influences how much individuals pay to borrow money and how much we pay to save.
The Federal Reserve raised borrowing prices by half a percentage point earlier this month and hinted that two more rises were on the way. With the central bank’s rate at 0.75 percent to 1%, another two rises could see the IRS paying 5 percent interest on late returns in no time, and 6 percent by the end of the year.
“It’s the fed funds rate, rounded down, plus 3%,” Burnette said.
Keep in mind that the government’s interest payments constitute taxable income, according to him and Smith.
Taxpayers who owe the IRS money now have to wait approximately three weeks for a direct-deposit refund, but only if they filed electronically and “provided everything is proper and accurate,” according to Burnette. He noted that those who want payment in the mail would have to wait another week or two.
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Smith recommends filing online and having your refund direct deposited. “If you don’t do that, be patient and enjoy your 4%,” he said, “because your check and your prince will arrive sometime.”