Perspective | The IRS paid $ 3 billion in interest to taxpayers because they failed to get repayments on time

In general, if a return is submitted on time, the IRS has a 45-day interest-free treatment window. If the agency misses this deadline, interest will be added to the refund. By the end of the summer, the IRS said, it had to send interest payments to nearly 14 million individual taxpayers who submitted their 2019 returns on time.

The average repayment interest rate last year was just $ 18, the IRS said. Of course, the amount for each Individual the taxpayer varied.

According to the tax code, the interest rate is determined quarterly. For private individuals, the overpayment and underpayment rate is the federal short-term interest rate plus three percentage points. At present, the interest rate is 3 percent.

On average, interest payments for late repayments do not lead to huge cases for taxpayers, although the IRS pays a higher interest rate on late repayments than you can earn on a savings account right now.

But the total cost to the government – or rather the taxpayers – is growing and worrying.

In response to the GAO report, the IRS pointed out that changing returns can reduce the amount of tax owed and thus trigger a repayment rate. The agency also attributed the increase in interest payments last year to the extension of the tax season from 15 April to 15 July, which was necessary due to office closures and demands for social distance to prevent the spread of coronavirus.

By law, the IRS still had to calculate and pay interest back until April 15, even though people had until July 15 to get their time back.

Despite the unusual circumstances of coronavirus-related delays, GAO found in its review of IRS data repaying interest payments have has increased in recent years and will continue to cost the government money if the agency does not address its backlog of unprocessed and suspended returns.

In fiscal year 2017, the IRS paid just over $ 1.1 billion in repayment interest. The following year, the amount was almost $ 1.6 billion, according to GAO results.

“Faced with an unprecedented crisis, the IRS took steps to address filing disruptions while protecting the integrity of its employees and the health of its employees,” the GAO said in its report. “Nevertheless, the IRS’s confidence in manual processing led to a significant backlog of paper-based and manual labor. ‘

Delays in handling returns and sending refunds are not just a pandemic problem, agreed Erin M. Collins of the Independent Taxpayers’ Advocacy, an organization within the IRS that helps taxpayers resolve agency issues.

The GAO report correctly identifies the elephant in the room – excessively dependent on paper to exchange information between taxpayers and the IRS, Collins said.

“Although the IRS plans to modernize its paper addiction reduction systems, it is slowly moving toward that goal due to a lack of adequate, multi-year funding,” Collins said. “IRS modernization is no longer a luxury or an option. The 2020 registration season highlighted the results of the IRS ‘continued dependence on outdated technology. ”

As of January 29, the IRS said they still had 6.7 million individual 2019 tax returns in their “processing pipeline.” And now the agency is handling an influx of returns for the current filing season. As of February 19, the IRS reported receiving nearly 35 million returns. Of the returns received, more than 16 million taxpayers were repaid, averaging $ 2,880.

In 2020 and will continue until 2021, the IRS has been in the difficult situation of having to balance the health and safety of its employees in meeting the needs of taxpayers. But millions of taxpayers are still waiting for the processing of returns and the dissolution of correspondence that is lost in the IRS system, Collins says.

“The huge amount of repayment interest paid to taxpayers can be seen as a benefit to some, but I think most taxpayers prefer to get their repayments and not wait,” she said.

And before you ask: Yes, the repayment rate that taxpayers may consider taxable income, which only increases the madness. It makes more economic sense to solve this problem than to continue to allow the government to waste billions on what amounts to late fees.