Still missing your tax refund? You'll soon receive 5% interest — but it’s taxable

If you’re still waiting for a tax refund, there’s a silver lining: it may be accruing interest, and the rate jumps to 5% from 4% on July 1, according to the agency’s latest quarterly adjustment. 

Typically, the IRS has 45 days after the filing deadline to process returns and send refunds. After that, the agency tacks on daily compounding interest, explained Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

Tied to the federal short-term rate, IRS interest currently falls below 8.3% annual inflation. But it’s still significantly higher than the average savings account.

While this sounds good, there is a downside: your interest is taxable.

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IRS interest payments ballooned to $3.3 billion in the fiscal year 2021, with a 33% spike from 2020 for individual returns, the U.S. Government Accountability Office reported.

The easiest way to check the status of a refund is through the “Where’s My Refund?” online tool or by using the IRS2Go app. The portal shows three steps: return receipt, refund approval and if the refund was sent, with an estimated deposit date.

Recently, the IRS updated the portal to include 2019 and 2020 returns, said Phyllis Jo Kubey, a New York-based enrolled agent and president of the New York State Society of Enrolled Agents.

“Before this upgrade, the online refund inquiry only covered current-year refunds, meaning that anyone inquiring about a prior-year refund had to call the IRS,” she said. 

High call volumes have been an ongoing issue with many taxpayers struggling to reach IRS agents. During the first half of 2021, there were fewer than 15,000 employees to handle over 240 million calls — one agent for every 16,000 calls, according to the National Taxpayer Advocate. 

“I hope this is the beginning of more enhancements to the IRS online refund inquiry tools, and I look forward to seeing more improvements,” Kubey said.

It’s been a difficult period for the IRS as the agency wrestles with pandemic-related backlogs.

The IRS started 2022 with about 8.2 million paper returns, and there were 1.7 million left as of May 6, Ken Corbin, the chief taxpayer experience officer for the agency told the House Oversight Subcommittee in May.

“Our goal is to bring the IRS back to a state prior to the pandemic,” he said. “We have to process this paper so we can get back to the business of providing the service the taxpayers deserve.”

IRS Commissioner Charles Rettig in March told House lawmakers he expects the backlog to clear by the end of 2022.