IRS = High Interest Savings Account?
February 21, 2012 9:41 AM Subscribe
True or False: If you're supposed to receive a refund from the IRS, but you file an extension and submit it at the very last, the IRS has to pay you the interest that has accrued on your refund, just like you'd have to pay any interest to the IRS if you owed taxes.
Is this true? If so, what is the interest rates (the person who told me about this said that the interest rate was about 8%, which is unbelievable!) and what are the risks?
Is this true? If so, what is the interest rates (the person who told me about this said that the interest rate was about 8%, which is unbelievable!) and what are the risks?
Heh. Yes. That is not true.
But there are situations in which the IRS will pay you interest:
1. The IRS will pay you interest that would be accrued on an overpayment.
2. "IRC 6603 codifies the taxpayer's right to make a deposit in lieu of a payment to stop the running of interest on a potential deficiency, and, for the first time, provides for the accrual of interest on a deposit returned to the taxpayer to the extent that the deposit is attributable to a disputable tax." (IRS manual)
There are other situations too I believe, almost none of which will be applicable to you or I.
posted by RJ Reynolds at 9:53 AM on February 21, 2012
But there are situations in which the IRS will pay you interest:
1. The IRS will pay you interest that would be accrued on an overpayment.
2. "IRC 6603 codifies the taxpayer's right to make a deposit in lieu of a payment to stop the running of interest on a potential deficiency, and, for the first time, provides for the accrual of interest on a deposit returned to the taxpayer to the extent that the deposit is attributable to a disputable tax." (IRS manual)
There are other situations too I believe, almost none of which will be applicable to you or I.
posted by RJ Reynolds at 9:53 AM on February 21, 2012
Actually, unbelievably true, just not as stated. There appears to be a massive loophole: the IRS has 45 days to pay you your refund, with no interest accompanying. If, for whatever reason, they take longer, they do in fact owe you interest. This can apparently happen because if you file after an extension it has to be on paper, and paper returns take a while to process.
According to the links below, the interest rate can be in the range of 7-8%. I would suspect this rarely happens, however - and 8% on a hypothetical $1k return for 46 days isn't really as much as you might think - it's about $10. Not a great investment strategy.
http://www.bankrate.com/finance/taxes/will-you-be-paid-interest-on-a-tax-refund.aspx
http://www.bankrate.com/brm/itax/tax_adviser/20060829a1.asp
posted by scolbath at 9:56 AM on February 21, 2012
According to the links below, the interest rate can be in the range of 7-8%. I would suspect this rarely happens, however - and 8% on a hypothetical $1k return for 46 days isn't really as much as you might think - it's about $10. Not a great investment strategy.
http://www.bankrate.com/finance/taxes/will-you-be-paid-interest-on-a-tax-refund.aspx
http://www.bankrate.com/brm/itax/tax_adviser/20060829a1.asp
posted by scolbath at 9:56 AM on February 21, 2012
Your refund is the amount that you overpaid the IRS during the year. They do not pay you interest on that. Thats why when you over withhold people say you are giving the government an interest free loan.
posted by Busmick at 9:56 AM on February 21, 2012
posted by Busmick at 9:56 AM on February 21, 2012
This can apparently happen because if you file after an extension it has to be on paper, and paper returns take a while to process.
Just to clarify, you can efile after having obtained an extension. The article linked to saying you can't efile returns after the deadline is talking about returns that are late. If you have received a valid extension, a return filed within the extension window is not considered late.
posted by phoenixy at 11:33 AM on February 21, 2012
Just to clarify, you can efile after having obtained an extension. The article linked to saying you can't efile returns after the deadline is talking about returns that are late. If you have received a valid extension, a return filed within the extension window is not considered late.
posted by phoenixy at 11:33 AM on February 21, 2012
The IRS doesn't owe you the refund until your tax return is processed. So the 45-day clock doesn't start ticking until you send in your tax return.
posted by Sidhedevil at 12:08 PM on February 21, 2012
posted by Sidhedevil at 12:08 PM on February 21, 2012
In 2010 I had to file an amended tax return because I closed on my house a few days after April 15th, but still within time to get the first time homeowner tax credit. I do recall seeing some interest that was earned on that refund, but I don't know the interest rate. I guess it took them longer than 45 days to process and that's why? Not 100% sure. Just an (anec)data point :)
posted by theRussian at 1:07 PM on February 21, 2012
posted by theRussian at 1:07 PM on February 21, 2012
Agree with scolbath. The IRS definitely pays interest on refunds in certain cases, but generally not in the situation you describe. I filed an amended return in 2011 to claim an adjustment that I missed on my 2009 taxes and the refund check I received had interest tacked on--about 3% APY worth--for which I received a 1099 and on which I wil pay taxes. At some points historically, it does appear that the interest rate on overpayments was on the order of 8%.
posted by roomwithaview at 7:05 PM on February 21, 2012 [1 favorite]
posted by roomwithaview at 7:05 PM on February 21, 2012 [1 favorite]
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posted by Oktober at 9:50 AM on February 21, 2012 [7 favorites]