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IRS paid $3 billion in interest to taxpayers because of late refunds

Advice on 2020 tax returns and stimulus checks
Advice on 2020 tax returns and stimulus check... 05:53

The Internal Revenue Service expects taxpayers to pay their taxes on time — and it also holds itself accountable for sending out late tax refunds. Last year, the agency sent out $3 billion in interest to taxpayers whose refunds were delayed, up 50% from the prior year. 

That's according to a new report from the Government Accountability Office, which assessed the IRS' performance last year during the coronavirus pandemic and outlined some risks to the 2021 tax season. The reason for the surge in interest payments due to late refunds is tied to the coronavirus outbreak, which caused a backlog of paper tax returns and prompted the IRS to delay the tax filing season by three months. 

In a response to the findings, the IRS pointed to the delay in the tax filing deadline as one reason for the increase in interest payments. The agency must issue refunds within a 45-day window after the April 15 filing date, or else it owes interest on the refund. But the delay in the tax deadline meant the IRS had to pay interest going back to that April 15 filing date even though it had given taxpayers more time to file. 

Too much paper

The report also highlighted another factor: a pileup in paper returns that IRS personnel struggled to process after the pandemic shut down its offices and workers shifted to remote work.

"IRS' overall 2020 performance was significantly impacted by its reliance on manual processes such as for paper returns, and its limited ability to process returns remotely while processing centers were closed," the GAO report said. "As a result, as of December 2020, IRS had a significant backlog of unprocessed returns and taxpayer correspondence."

While the GAO highlighted the challenges of the pandemic as a culprit in the surge in interest payments, it pointed out that the IRS has been paying out more in interest payments on late refunds for several years prior to the pandemic. That's likely to increase for the current tax season "until IRS addresses its backlog of unprocessed and suspended returns," the GAO added. 

IRS backlog

Taxpayers aren't exactly getting rich from the IRS interest payments on late refunds, given that the agency's interest rate is 3%. The average amount of interest paid to taxpayers for late refunds was $18, according to the Washington Post.  

The IRS is still digging out from a backlog of tax returns filed last year, when the agency shifted its workers to remote work and stored paper tax returns in trailers until it could get to them. The backlog of unprocessed returns from last year still numbers in the millions.

"According to IRS officials, when IRS staff returned to work at processing centers, they resumed opening mail on a first in, first out basis — opening mail with the earliest received date," the GAO report noted. "At the end of the filing season, IRS' mail backlog was significant — a volume of nearly 8 million — with IRS returns processing staff opening mail received months prior."

How the pandemic could impact tax filing 04:32

About 9 in 10 individual returns are filed electronically, but the GAO found that more than 20% of businesses filed paper returns even though they could have e-filed, which is a faster option because processing is automated. 

Indeed, the IRS — which was still processing 6.7 million returns at the end of January — has advice for taxpayers in the current tax season: Use e-file.

"There is no doubt this is the year to file electronically," Ken Corbin, the new chief taxpayer experience officer at the IRS, said last month. Taxpayers who file paper returns "need to prepare for a lengthy potential wait."

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