- Since the original Tax Day was postponed due to a disaster, the IRS will pay up to 5% interest on refunds issued after April 15. But you must file by July 15.
- Interest on your refund may be taxable when you file your 2020 tax return next year.
- The average tax refund issued as of July 3 is $2,762.
Here's an incentive to get your tax return out today: The IRS will pay up to 5% interest on late tax refunds.
The taxman said it would credit interest on tax refunds that are paid after April 15 – the original due date for your 2019 federal income tax return.
There's a catch: To collect the interest, you must file by midnight July 15, the new due date for last year's returns and income tax payments.
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It's especially welcome news to filers who have submitted paper tax returns or who have been corresponding with the IRS over additional verification.
These individuals may have been waiting months for a refund as the agency began calling its employees back to the office and picking through millions of pieces of mail.
The fact that the original Tax Day deadline was postponed due to the Covid-19 pandemic is a driver behind the reason why the IRS is paying taxpayers interest.
"This year's July 15 filing date is considered a disaster-related postponement of the filing deadline," said IRS spokesman Eric Smith.
"Where a disaster-related postponement exists, the IRS is required by law to pay interest, calculated from the original April 15 filing deadline, as long as an individual income taxpayer files a 2019 tax return by the postponed deadline —July 15, 2020 in this instance."
The IRS adjusts its interest rate every quarter. The agency will generally pay interest from April 15 until the date the refund is issued.
It's crediting 5% per year, compounded daily, for the second quarter ending on June 30.
For the third quarter, ending Sept. 30, the agency will credit 3% interest.
In comparison, high-yield savings accounts are paying just over 1%, according to Bankrate.com.
You may receive interest payments separately from your refund, according to the IRS.
Track how much the taxman pays you, as the interest you get from the agency will be subject to taxes when you file your 2020 taxes next year.
"This isn't free money," said Dan Herron, CPA and principal at Elemental Wealth Advisors in San Luis Obispo, California. "You're going to get a Form 1099-INT from the IRS in 2020."
The cost of missing the July 15 deadline is steep for people who owe the IRS. Failure to pay penalties are 0.5% of the tax owed, while failure to file carries a penalty of 5% of the unpaid tax.
If the IRS owes you a refund, however, you can't collect it until you file.
With the average refund totaling $2,762 as of July 3, you may as well e-file today and snap up your interest.