Millions of Americans are still awaiting their tax refunds from the IRS, but there is a silver lining: The money may be accruing interest – and rates are poised to jump in January.
The Internal Revenue Service generally pays interest on refunds that are delayed by more than 45 days after the filing deadline, according to its website.
Interest rates are adjusted every quarter depending on the federal short-term rate. The current interest rate is 6%, but it is slated to increase to 7% on Jan. 1. By comparison, one year ago, the interest rate stood at 3%.
As of mid-November, the IRS had to process about 3.7 million individual tax returns received this year, including 1.7 million returns requiring error correction or other special handling and an additional 2 million that are paper returns waiting to be reviewed and processed.
Still, there is a downside, which is that the interest paid by the IRS is taxable.
IRS interest payments surged 33% in the fiscal year 2021, with the tax-collecting agency paying out nearly $3.3 billion for individual returns, the U.S. Government Accountability Office reported.
Although more than 90% of taxpayers submitted their returns electronically last year at the request of the IRS, some 17 million sent paper filings, exacerbating the pile-up of returns. It is disproportionately older Americans who file their returns via mail.
As a result, some taxpayers who submitted paper-filed returns have had to wait an unusually long time to receive their refunds, with wait times routinely exceeding six months. Some Americans have waited 10 months or more, according to a report from the National Taxpayer Advocate.
The heap of unprocessed returns stemmed from pandemic-related disruptions, including a worker shortage, the herculean task of administering millions of stimulus checks and adapting to other tax changes in the different COVID-19 relief packages, like boosted child tax credit payments.
If you are still waiting for your refund, you can track its status using the IRS' Where’s My Refund tool.
The IRS has laid out a goal to reach "healthy" levels of inventory by the end of 2022.
Taxpayers typically receive a refund if they had too much money withheld and overpaid their taxes the previous year. For many families, the money can be substantial: Nearly three-quarters of filers received a tax refund in 2022, with an average payment worth about $3,176 – up from about $2,800 in 2021.