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IRS is sitting on roughly 9.6 million unprocessed tax returns, owing billions in refunds. - After 45 days, the agency has to pay interest on refunds to the taxpayer, currently at a 4% rate.
An understaffed and underfunded IRS has been struggling to get millions of Americans their tax refunds for months. Now, those taxpayers waiting on checks will see a little bit more in their wallets — whenever their payments eventually arrive.
The IRS has 45 days after a return is filed to process it and pay out a refund, after which the agency has to pay interest. As of April 1, the interest rate for individual filers, which is tied to the Federal Reserve's benchmark rate, ticked up from 3% to 4%.
With the IRS sitting on a backlog of millions of returns, that extra point could amount to a big chunk of cash for the Treasury.
A recent Government Accountability Office report found that the IRS paid almost $14 billion in interest over the last 7 fiscal years. Nearly a quarter of that was paid out in 2021 alone when the IRS paid $3.3 billion in interest, due in large part to the ongoing disruptions and challenges the agency has been experiencing since the pandemic.
"It's not a small amount of money," Jessica Lucas-Judy, the director of tax issues at GAO, told the The Wall Street Journal's Richard Rubin.
But interest payments may just be a drop in the bucket for the millions of Americans still waiting on tax refunds. Last week, the IRS disclosed it had a backlog of 9.6 million unprocessed returns. It did not specify how many of those were at the 45-day mark, but said the number includes returns received "before 2022."
It's a remnant of the backlog of millions of returns that the IRS accrued in 2021, where, according to national taxpayer advocate Erin Collins, many taxpayers waited as long as nine months for refunds.
Another reason the interest payments are getting larger: Filing extensions granted by Presidents Donald Trump and Joe Biden in 2020 and 2021, respectively. While taxpayers were allowed to file late, the refund deadline was tied to the original Tax Day, giving the agency even less time to process a return before interest started accruing.
Refunds can be an important economic lifeline for taxpayers, especially lower-income ones. Filers who were still waiting on 2020 refunds in February told Insider that, without their checks, they were struggling to afford groceries, childcare, and even their homes.
"I just wish that people would understand that there are people out there like me who struggle, who are single parents, and that depend on their tax returns to pay their bills and to stay afloat," Andrea Grant, a 38-year-old in Wyoming who was waiting on nearly $9,000, previously told Insider.
The interest payments come as the IRS struggles with funding. The agency has seen its budget shrink by 23% since 2010, according to the Tax Policy Center.
If the agency had adequate funding, delays — and the costs and time poured into the filing season — could potentially be a thing of the past.
A working paper in the National Bureau of Economic Research from researchers from the Treasury Department, Minneapolis Federal Reserve Bank, and Dartmouth College, looked at how many returns could be accurately pre-populated from the previous year's information and information collected throughout the year. They found that nearly half of returns could already be accurately filled out, bypassing the need for taxpayers to prepare their own forms.
But that's far from the IRS's current reality, where workers sift through piles of paper to get delayed refunds out.
While most taxpayers will likely be glad to see the extra interest, there is a slight downside: the IRS considers those interest payments to be taxable income.