The IRS Is Paying Out 3% To 5% Compounded Daily Interest On Almost All Refunds Issued After April 15 This Year

In a world where interest doesn't really exist anymore, the IRS will surprisingly be paying quite a bit of it on most refunds issued after April 15 this year.

Even though the tax deadline was extended to July 15 this year, the IRS will be paying interest on any refunds issued after April 15, according to a decision made by the agency last week. It's the result of a "quirk in the tax code" combined with the unusual step taken this year of extending the filing deadline, according to the WSJ

In other words, if you chose to wait on filing this year, you're likely to be paid a penalty, instead of owing one. 

The agency hasn't estimated how many people will receive interest but it has processed about 11 million refunds between mid-April and mid-June already. Just as the agency would charge for you holding onto your payments too long, it technically owes interest for holding on to people's refunds too long.

And the interest is sizeable: 5% compounded daily for Q2 and 3% compounded daily starting on July 1. 

Those who elected to take the extension granted by the agency as a result of the coronavirus pandemic and file at the last minute are the ones who will likely get the biggest interest payments. 

Every year there is usually a rule that gives the IRS a 45 day grace period after April 15 before they have to start paying interest. This year, due to the extension, that clock starts right at April 15th instead. 

Keith Fogg, who directs the Harvard Law School program that offers tax assistance to low-income households, told WSJ: “The IRS seems to have chosen a method that is very taxpayer friendly and will not subject it to criticism. Hard to fault it for that.”

The interest payments could arrive separately from tax refunds, the agency said. Of course, the interest will be taxable 2020 income. Can't win them all...