IRS Has Millions of Delayed Tax Returns, and Is Paying Billions in Interest to Those Waiting

WASHINGTON—Americans can earn guaranteed 4% interest when money-market funds and savings accounts aren’t paying even half that. The catch: The IRS has to be sitting on your tax refund.

That 4% rate for individuals took effect in April—up a percentage point from the prior quarter. The rate for large corporate refunds is 1.5%, up from 0.5%. Generally, the Internal Revenue Service has 45 days to process a tax return and pay a refund. After that, interest starts accruing in amounts tied to federal short-term interest rates and adjusted each quarter.

Those interest payments have real costs for the public: In fiscal year 2021, the IRS paid $3.3 billion in interest to tax filers, more than triple what it paid in 2015, according to a Government Accountability Office report. For the fiscal year that started in October, refund interest payments through March are down 11% but still well above 2019 levels, according to Treasury Department data.

“It’s not a small amount of money,” said Jessica Lucas-Judy, director of tax issues at GAO. “If there’s some way to avoid some of these payments, that’s probably a good thing.”

The IRS has been moving slower than usual to process tax returns. Administration officials say that is the result of years of Republican-backed budget cuts. Republicans say the agency hasn’t given priority to taxpayer service. Some recent years have been particularly difficult. In fiscal 2019, the aftermath of a government shutdown caused a backlog. The IRS slowed again when the coronavirus pandemic began in 2020 and is still months behind schedule in processing paper returns.

As of April 29, the IRS has 9.6 million unprocessed individual tax returns, some from tax year 2020 and some from 2021. The agency says it is taking more than 20 weeks to handle amended tax returns and hopes to catch up on all of its processing backlogs by the end of 2022.

The $3.3 billion in interest payments is a tiny fraction of total federal spending, but the amount is equal to about one-quarter of what it costs to run the tax agency. Interest payments don’t come out of the IRS budget.

For taxpayers who need their refunds for living expenses, the interest might not amount to much consolation for the long waits. And the payments are taxable income. But for companies and those individuals who can afford to wait, the money can add up. This also works in reverse. Taxpayers who owe the IRS money are charged interest by the government.

The GAO says the IRS isn’t doing enough to limit interest payments. “IRS does not fully understand the causes for refund interest payments—both within and outside of its control—and therefore cannot communicate this information to Treasury and Congress,” GAO wrote.

The IRS, in its official response to the report, said refund interest payments can’t be analyzed in a vacuum, and that some costs aren’t its fault but are required under the law. The agency also noted that interest rates vary over time and the government does actually have use of the money while it processes refunds.

“Our role is to administer the Tax Code as it is enacted,” wrote Douglas O’Donnell, deputy commissioner for services and enforcement. “We do not believe the amount of interest paid is a reliable or meaningful business measure.”

Some refund interest costs stem from specific decisions by Congress and the White House. In 2020, the Trump administration delayed the individual tax-filing deadline to July 15 from mid-April, and in 2021, the Biden administration delayed it to May 17.

Those changes gave taxpayers and preparers more time to get their returns in. But under the tax code, interest began accruing 45 days after the mid-April deadline, meaning that the IRS was forced to make payments covering periods before the returns were actually due.

Nina Olson, the former longtime in-house taxpayer advocate at the IRS, said the government should get technology that would let it do automatic processing for returns that are prepared with tax software but are printed out on paper and mailed in. Currently, employees transcribe those by hand and enter them into the IRS computers.

“I don’t think the IRS shrugs it off,” Ms. Olson said of the rising interest costs. “It’s just that we have had two and now three filing seasons that have been abnormal.”

Write to Richard Rubin at [email protected]

WASHINGTON—Americans can earn guaranteed 4% interest when money-market funds and savings accounts aren’t paying even half that. The catch: The IRS has to be sitting on your tax refund.

That 4% rate for individuals took effect in April—up a percentage point from the prior quarter. The rate for large corporate refunds is 1.5%, up from 0.5%. Generally, the Internal Revenue Service has 45 days to process a tax return and pay a refund. After that, interest starts accruing in amounts tied to federal short-term interest rates and adjusted each quarter.

Those interest payments have real costs for the public: In fiscal year 2021, the IRS paid $3.3 billion in interest to tax filers, more than triple what it paid in 2015, according to a Government Accountability Office report. For the fiscal year that started in October, refund interest payments through March are down 11% but still well above 2019 levels, according to Treasury Department data.

“It’s not a small amount of money,” said Jessica Lucas-Judy, director of tax issues at GAO. “If there’s some way to avoid some of these payments, that’s probably a good thing.”

The IRS has been moving slower than usual to process tax returns. Administration officials say that is the result of years of Republican-backed budget cuts. Republicans say the agency hasn’t given priority to taxpayer service. Some recent years have been particularly difficult. In fiscal 2019, the aftermath of a government shutdown caused a backlog. The IRS slowed again when the coronavirus pandemic began in 2020 and is still months behind schedule in processing paper returns.

As of April 29, the IRS has 9.6 million unprocessed individual tax returns, some from tax year 2020 and some from 2021. The agency says it is taking more than 20 weeks to handle amended tax returns and hopes to catch up on all of its processing backlogs by the end of 2022.

The $3.3 billion in interest payments is a tiny fraction of total federal spending, but the amount is equal to about one-quarter of what it costs to run the tax agency. Interest payments don’t come out of the IRS budget.

For taxpayers who need their refunds for living expenses, the interest might not amount to much consolation for the long waits. And the payments are taxable income. But for companies and those individuals who can afford to wait, the money can add up. This also works in reverse. Taxpayers who owe the IRS money are charged interest by the government.

The GAO says the IRS isn’t doing enough to limit interest payments. “IRS does not fully understand the causes for refund interest payments—both within and outside of its control—and therefore cannot communicate this information to Treasury and Congress,” GAO wrote.

The IRS, in its official response to the report, said refund interest payments can’t be analyzed in a vacuum, and that some costs aren’t its fault but are required under the law. The agency also noted that interest rates vary over time and the government does actually have use of the money while it processes refunds.

“Our role is to administer the Tax Code as it is enacted,” wrote Douglas O’Donnell, deputy commissioner for services and enforcement. “We do not believe the amount of interest paid is a reliable or meaningful business measure.”

Some refund interest costs stem from specific decisions by Congress and the White House. In 2020, the Trump administration delayed the individual tax-filing deadline to July 15 from mid-April, and in 2021, the Biden administration delayed it to May 17.

Those changes gave taxpayers and preparers more time to get their returns in. But under the tax code, interest began accruing 45 days after the mid-April deadline, meaning that the IRS was forced to make payments covering periods before the returns were actually due.

Nina Olson, the former longtime in-house taxpayer advocate at the IRS, said the government should get technology that would let it do automatic processing for returns that are prepared with tax software but are printed out on paper and mailed in. Currently, employees transcribe those by hand and enter them into the IRS computers.

“I don’t think the IRS shrugs it off,” Ms. Olson said of the rising interest costs. “It’s just that we have had two and now three filing seasons that have been abnormal.”

Write to Richard Rubin at [email protected]