- The IRS has approximately 9.6 million unprocessed tax returns that owe billions in refunds.
- After 45 days, the agency is required to pay interest on refunds to the taxpayer, which is currently set at 4%.
- Some filers have been waiting for their refunds for up to nine months.
For months, an understaffed and underfunded IRS has struggled to get tax refunds to millions of Americans. Those taxpayers who are waiting on checks will now have a little more money in their pockets — whenever their payments arrive.
The IRS has 45 days after receiving a return to process it and issue a refund, after which it must pay interest. Individual filers’ interest rate, which is linked to the Federal Reserve’s benchmark rate, increased from 3% to 4% as of April 1.
With the IRS sitting on a backlog of millions of returns, that extra point could mean a large sum of money for the Treasury.
According to a recent Government Accountability Office report, the IRS paid nearly $14 billion in interest over the last seven fiscal years. Almost a quarter of that was paid out in 2021 alone, when the IRS paid $3.3 billion in interest, owing largely to the ongoing disruptions and challenges the agency has faced since the pandemic.
“It’s not a small sum of money,” GAO director of tax issues Jessica Lucas-Judy told The Wall Street Journal’s Richard Rubin.
However, interest payments may be a drop in the bucket for the millions of Americans who are still awaiting tax refunds. The IRS revealed last week that it had a backlog of 9.6 million unprocessed returns. It did not say how many were at the 45-day mark, but it did say the figure includes returns received “before 2022.”
It’s a holdover from the IRS’s backlog of millions of returns in 2021, when many taxpayers waited as long as nine months for refunds, according to national taxpayer advocate Erin Collins.
Another factor driving up interest payments is filing extensions granted by Presidents Donald Trump and Joe Biden in 2020 and 2021, respectively. While taxpayers could file late, the refund deadline was tied to the original Tax Day, giving the agency even less time to process a return before interest accrued.
Refunds can be a vital economic lifeline for taxpayers, particularly low-income ones. Filers who were still waiting on 2020 refunds in February told Insider that they were struggling to afford groceries, childcare, and even their homes without their checks.
“I just wish people would understand that there are people out there like me who struggle, who are single parents, and who rely on their tax returns to pay their bills and stay afloat,” Andrea Grant, 38, of Wyoming, previously told Insider.
The interest payments come as the IRS struggles to meet its obligations. According to the Tax Policy Center, the agency’s budget has shrunk by 23% since 2010.
Delays, as well as the costs and time invested in the filing season, could potentially be eliminated if the agency received adequate funding.
Researchers from the Treasury Department, Minneapolis Federal Reserve Bank, and Dartmouth College examined how many returns could be accurately pre-populated from previous year’s information and information collected throughout the year in a working paper published in the National Bureau of Economic Research. They discovered that nearly half of all returns could already be filled out correctly, eliminating the need for taxpayers to prepare their own forms.
However, that is not the current reality at the IRS, where employees sift through piles of paper to issue delayed refunds.
While most taxpayers will be relieved to see the extra interest, there is one small catch: the IRS considers interest payments to be taxable income.