I am sure you have heard the old adage that by getting a tax refund you’re giving an interest free loan to the IRS. Well this time it looks like that won’t hold as the IRS is actually going to pay interest on refunds paid in the past three months or those yet to be paid. As a result they will be issuing millions of tax refund interest payments over the next few months. Now before you think the IRS has become a benevolent organization, let me dispel that thought and confirm that the real reason is due to the COVID related postponement to this year’s tax filing deadlines.
In pandemic or disaster related postponements (like the Coronavirus) the IRS is required, by law, to pay interest, calculated from the original filing deadline (April 15th), as long as an individual files a 2019 federal income tax return by the postponed deadline, July 15, 2020.
According news release 2020-183, the IRS will be sending interest payments to over 14 million individual tax payers (business’ are not eligible) who filed their 2019 tax returns on time and were already paid or due a refund in the past three months or are still due their refund payment. While the amount won’t be massive – averages $18, but could be higher for those with big refunds – it will be a nice little bonus when many families are short on cash. Note that this interest payment will be sent separately to your tax refund payment, but should be paid in the same way you got (or getting) your refund.
Early filers and those who got their refund payments before April 15th, are however out of luck and won’t be getting this payment! Similarly those who filed late or requested an extension for their tax filing (and maybe due a refund) won’t be getting the payment either.
The bad news though is that while you will get these tax refund interest payments in 2020, you will have to pay tax on the interest (since it is income) in 2021 when you file your 2020 tax return. You will get a form 1099-INT from the IRS to for this payment and because they are issuing it, you won’t be able to avoid disclosing it!
Note – there is a long-standing 45-day rule provision which requires the IRS to add interest to refunds on timely-filed refund claims that are issued more than 45 days after the return due date. However while this was not the reason for this interest payment you should keep this mind for future years given delays many people may see based on the 2021 IRS processing schedule.