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By Kenadi Silcox
August 27, 2020
Shutterstock

The next time you check your bank account, you might find a small surprise among your regular payments and purchases.

Nearly 14 million individual taxpayers will receive a small interest payment in the coming weeks, the IRS announced recently. The payments will average around $18 and will be deposited in the same manner that individuals received their tax returns — for most this means a direct deposit to their bank account. The rest will be mailed out with a notation on the check indicating it is a refund interest payment.

Why is the federal government paying you interest? By law, the IRS is required pay interest on tax refunds if it is more than 45 days late in issuing a refund for an on-time tax return. In other words, if you are set to get money back from your taxes, and you filed ahead of the annual deadline, interest will start accruing on that money if the government is late paying you. Normally, this affects a relatively small number of taxpayers, but this year, due to staff shortages and the pandemic, the IRS was slower than normal with refunds. (The agency was busy issuing stimulus checks, too.)

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There's also a new component this year: the tax filing deadline was pushed back to July 15 due to the COVID-19 crisis; during a disaster-related delay such as this, the IRS is legally required to pay interest on money owed to anyone who hasn't received their return by the original April 15 deadline. That includes people who filed after April 15 but before the July deadline.

The interest is paid by the official rates designated by the IRS, so from April 15 to June 30, it was 5% compounded daily, and then 3% compounded from July 1 onward. If you're wondering how they manage to figure out such high percentage points while your savings rate at the bank keeps on shrinking, it's because the IRS calculates its rates by taking the federal short-term rate and adding three percent.

Unfortunately, these interest payments are not available to every taxpayer. If you filed early as encouraged and received a full tax return before the April 15 deadline, you are not eligible for an interest payment because the federal government didn’t hold onto your tax dollars after the original deadline.

While a few extra dollars can certainly be exciting to see, especially if you’re one of the thousands of Americans whose refund was severely delayed, taxpayers who receive interest payments should know that these payments are taxable, meaning you will need to report the interest on your 2020 federal income tax return when you file. The IRS has stated that it will be sending out Form 1099-INT to anyone whose interest payment is at least $10.

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