- The IRS has 9.6 million unprocessed tax returns on its hands, owing billions in refunds.
- The agency must pay interest on returns to the taxpayer after 45 days, which is presently at 4%.
- Some taxpayers have been waiting for refunds for up to nine months.
For months, an understaffed and underfunded IRS has struggled to provide tax refunds to millions of Americans. Those taxpayers who have been waiting for checks will now have a little more money in their wallets when they do arrive.
The IRS has 45 days to review a return and issue a refund once it is filed, after which it must pay interest. Individual filers’ interest rate, which is related to the Federal Reserve’s benchmark rate, increased from 3 percent to 4% on April 1.
With the IRS facing a backlog of millions of returns, every extra point may mean a large sum of money for the Treasury.
According to a recent audit by the Government Accountability Office, the IRS paid about $14 billion in interest over the last seven fiscal years. The IRS paid $3.3 billion in interest in 2021 alone, accounting for about a quarter of that total, owing in large part to the continued delays and issues the agency has faced since the outbreak.
Jessica Lucas-Judy, the GAO’s head of tax issues, told Richard Rubin of The Wall Street Journal, “It’s not a tiny amount of money.”
However, for the millions of Americans still waiting for tax refunds, interest payments may be a drop in the bucket. The IRS announced last week that it had a backlog of 9.6 million unprocessed returns. It didn’t say how many were at the 45-day threshold, but it did say the total covers returns received “before 2022.”
It’s a holdover from the IRS’s backlog of millions of returns in 2021, when many people waited up to nine months for refunds, according to national taxpayer advocate Erin Collins.
Another factor driving up interest payments is Presidents Donald Trump and Joe Biden’s filing extensions in 2020 and 2021, respectively. While late filing was permitted, the refund deadline was connected to Tax Day, giving the IRS even less time to review a return before interest began to accrue.
Refunds can be a lifeline for taxpayers, particularly those with modest incomes. In February, filers who were still waiting for their 2020 refunds told Insider that they were struggling to finance groceries, childcare, and even their houses without their checks.
Andrea Grant, a 38-year-old Wyoming woman who was waiting on nearly $9,000, previously told Insider, “I just hope that people would understand that there are individuals out there like me who struggle, who are single moms, and who rely on their tax returns to pay their bills and remain afloat.”
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The interest payments come as the IRS faces funding challenges. According to the Tax Policy Center, the agency’s funding has decreased by 23% since 2010.
Delays, as well as the expenditures and effort invested in the filing season, could be eliminated if the agency received appropriate financing.
Researchers from the Treasury Department, the Minneapolis Federal Reserve Bank, and Dartmouth College looked at how many returns could be accurately pre-populated from the previous year’s data and data collected throughout the year in a working paper published by the National Bureau of Economic Research. They discovered that roughly half of all returns could be accurately filled out without taxpayers having to produce their own forms.
But that’s a far cry from the IRS’s current reality, where employees dig through mountains of documentation in order to issue overdue refunds.
While most taxpayers will welcome the increased interest, there is one drawback: those interest payments are taxable income according to the IRS.