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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In spite of the Biden Gang’s attempts to pretend that there is no such thing as Inflation, IRS is required to adjust how much they charge for late payments and pay out for late refunds.

As of October 1, 2002, the rate will move from the current 5.0% APR to 6.0% APR.

Here is their official press release, announcing this:

IRS announces interest rate increases for the fourth quarter of 2022; 6% rate applies to most taxpayers starting Oct. 1

Three months from now, there will most likely be another IRS announcement of an even higher rate as of January 1, 2023.

For those people trying to maximize their return on investment, this presents an opportunity to earn much more than banks are paying. In earlier times when IRS interest rates were higher than bank savings accounts, I can recall some clients and others holding off on filing amended refund returns for longer than normal in order to accrue more interest from IRS. I’m not necessarily advising this, but just noting that it is a tactic that some people do in times like this.

Unlike most State tax agencies, which don’t ever change the interest rates that they charge on late tax payments (Arkansas has always been 10%) or adjust them annually (California, et al), IRS modifies its rates every three months to stay in sync with the overall financial markets.

As anyone would have expected, IRS has just announced that, as of July 1, it will be bumping up the rate it will be charging to 5% from the current 4%.

Here is their press release: IRS interest rates increase for the third quarter of 2022

If you want to consider a good side to this, besides charging taxpayers more on late tax payments, this also means that IRS will be paying taxpayers more for delayed refunds. Those millions of people who still have tax returns stuck in the IRS backlog of unprocessed returns will be earning much more from IRS than any banks are currently paying on savings accounts.

Every three months, IRS looks at the current inflation rate and determines how much interest they will be charging taxpayers on late tax payments and paying out to taxpayers for delayed refunds. For the past seven quarters – since July 1, 2020 – it has been three percent (3.0%) APR. It’s not per day. It’s an annual rate.

As we all know, inflation is currently at its highest pace since Jimmy Carter’s reign. IRS has just announced in this press release that, as of April 1, their main interest rate will be a whopping four percent (4.0%) APR.

As I remind clients who are upset about the IRS’s lengthy delays in sending out refunds, their money will be earning a much higher return from IRS that it would in a bank, where they are still paying less than one percent on savings accounts. It’s the silver lining to a bad situation.

Three months from now, I expect to be writing a similar post about IRS raising their interest rate again, to five or six percent.