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IRS Pays Interest on Late Refunds

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A few years ago, it became really popular to start writing about adjusting your withholding so you didn’t get an enormous refund after you filed your tax return. It’s good advice and the main argument against over-withholding was that you were giving the IRS, technically the Treasury Department, an interest free loan. One thing I didn’t know was that in the event that the IRS underpays you, as a result of their error, they will actually pay interest you interest based on the same rates as what they charge taxpayers for underpayment. This is all governed by Section 6621 of the Internal Revenue Code.

The cases of underpayment by the IRS are rare. The IRS has forty-five days to process a tax return and will pay interest on your refund if it takes longer than forty-five days to process your return. If you are due a refund and you don’t file a return, the IRS won’t pay interest whenever you do. If you file a return, make a mistake that results in a greater refund, you might be paid interest. In those cases, it usually has to be an error that the IRS could’ve caught, like reporting of an expense that you failed to claim.

Finally, if you get examined or audited and the results show that you were owed a refund, they will pay interest on that as well.

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3 Responses to “IRS Pays Interest on Late Refunds”

  1. Wow, definitely did not realize this. it makes perfect sense, but I am surprised Uncle Sam is this charitable!

  2. Shannon says:

    I can attest to this – It took the IRS a few months to process my homeowners credit when I bought my house, right when the credit was expiring. When I received the check I was pleasantly surprised to see a good amount of interest.

  3. susieq says:

    After returning my electronically submitted return over three weeks ago, I received a letter saying I was being audited. My company withheld over $18000.00 on my $78000.00 salary for a company “buyout” in 2011. This was excessive withholding. It should have been around $5000.00 plus. I spoke with an IRS rep. and was told that due to “so many people cheating on their taxes” that the backlog is “approx. 8 or 9 “months” to receive a refund on an audited refund?????
    I know there is a new IRS program to stem fraud but this is extremely excessive. I wonder if our senators and congress are aware of this? (They will be by next week, as I intend on notifying them).I have never cheated on my taxes and only used interest on my mortgage and property taxes as deductions, but now have to wait for an excessive period of time for the government to refund my money that is legally owed to me. They should have to pay interest!!!!!!!!!


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