Millions of Americans still have tax returns in limbo as the IRS works to clear its backlog.
But there’s a little good news if you’re missing a refund: You may be earning interest on your unpaid balance, and the rate jumps to 6% from 5% on Oct. 1, according to the agency.
Typically, the IRS has 45 days to process your tax return and issue a refund before interest starts to accrue. Interest adjusts every quarter based on the federal short-term rate.
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How to calculate your interest
The interest is an annual rate compounded daily, meaning you divide the 6% rate by 365, explained Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
With the average brick-and-mortar savings account paying well below 1%, the IRS interest may sound appealing. However, it’s still lower than annual inflation, which grew by 8.5% in July.
And with the average 2021 tax refund at more than $3,000, many filers would rather have their payment on time, Lucas said.
For perspective, in 2020, the IRS reported that the average refund interest check on 2019 federal returns was $18. Interest rates at that time were 5% during the second quarter, and 3% during the third quarter.
‘It’s taxable, so be prepared to report it’
While the interest may offer some solace, there’s a downside: “It’s taxable, so be prepared to report it,” Lucas said.
If you’re paid interest for a delayed refund, you can expect to receive Form 1099-INT from the IRS, which must be included on your tax return, he said.
It’s taxable, so be prepared to report it.Tommy Lucasfinancial advisor at Moisand Fitzgerald Tamayo
“If it doesn’t cross-check, they’re going to flag it and your return is going to get held up,” Lucas said. “Don’t forget about that interest because they will expect you to include it on Schedule B.”
He said delayed tax refunds and interest payments speak to the importance of filing an error-free return to avoid processing delays.
As of Aug. 5, there were 9.7 million unprocessed individual 2021 tax returns, according to the IRS, with 1.8 million requiring “error correction or other special handling.”