Tax Guru – Ker$tetter Letter

For the fourth straight quarter, IRS will be raising the interest rate that it charges on back taxes and pays on late refunds. As of 1/1/23, it will be 7.0%. This is good news for those who have refunds coming, but not so good if you owe IRS money.

With most banks still paying ridiculously low rates on their savings accounts, we may see the return of a strategy to maximize interest yields by “investing” with the IRS. There have been cases in the past where taxpayers intentionally overpaid their taxes to IRS by “accidentally” leaving off large legitimate deductions. A few years later, they (hopefully) “notice” their mistake and file an amended return (1040X) with IRS to recoup those overpaid taxes and much more interest on top of that than they could have earned with alternative uses of that money.

Anyone considering such a tactic should heed a few warnings:
1. If the 1040X is not submitted within the three-year statute of limitations, the refund will be forfeited and considered to be a gift to the IRS.

2. Amended returns receive much more scrutiny from IRS than original returns, especially when claiming a refund. When examining an amended return, it is not uncommon for IRS to initiate a full-blown audit on other things on the return, not just the item triggering the amendment. I have seen this happen and the ensuing hassles caused the taxpayers to regret ever filing the amended return.

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How long will this upward trend in interest rates continue? No sane person is anticipating a slow-down in the current inflation snowball for at least another two to three years, when there may be a new occupant of the White House. By then, the rate will definitely be in the double digits, which hasn’t been the case since the last quarter of 1991.

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IRS Press Release Announcing the Higher Interest Rate:
Interest rates increase for the first quarter of 2023

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A very handy chart of IRS Interest Rates, going back to the beginning of 1987, including this section for the past few years.

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