For many years, there has been a 45-day rule which requires the IRS to pay interest on refunds issued after more than 45 days of the taxpayer’s claim, as long as the tax return was filed by the tax deadline. As we know, the coronavirus pandemic led to a postponement in the tax deadline from April 15th to July 15th. Given the nature of the pandemic, this change was considered a disaster-related postponement, meaning the IRS is required, by law, to pay interest for refund delays resulting from this event.
Who qualifies for an interest payment?
Qualifying taxpayers include individual tax filers who filed a 2019 return by the postponed deadline of July 15th and have received a refund during the past three months or are expecting to receive one. Individuals who received their tax refund before the original April 15th deadline and businesses will not be eligible.
How much and how can you expect to receive the payment?
Interest will be calculated per the legally prescribed rate, which is adjusted quarterly. This said, from April 15th to the end of the second quarter (June 30th), interest was 5%, compounded daily. From July 1st to the end of the third quarter, the interest rate was reduced to 3%, compounded daily.
In most instances, the interest payment will be issued separately from the tax refund. If the tax refund was issued via direct deposit, the interest payment will be direct deposited also. Approximately 12 million of the 13.9 interest payments are expected to be direct deposited. The remaining payments will be issued via check by mail.
Implications on next year’s return filings
Interest payments are taxable by law. As such, they will need to be reported on your 2020 federal income tax filing. Anyone receiving an interest payment of $10 or more should be on the lookout for a Form 1099-INT, which the IRS will be sending taxpayers for their 2020 filings.