Millions of Americans could face unexpected charges on their 2023 tax returns — not from underpayment or fraud, but from **interest** owed on delayed payments they received from the IRS. A technical shift in the timing and disbursement of refunds, coupled with IRS backlogs in prior years, has led to an unusual tax ripple effect in 2024. For many, the surprises aren’t necessarily welcome — especially if they thought their refunds were final and no further reporting was required.
The Internal Revenue Service previously sent out millions of refund payments in 2020 and 2021 as part of its effort to process postponed returns and shovel out aid checks during the COVID-19 pandemic. Refunds paid later than 45 days from filing generally included **IRS-paid interest**, which is taxable. Now, it’s time for taxpayers to reconcile that interest, and for many it might be the first time they’ve encountered this kind of reporting requirement. Here’s what you need to know, how to prepare, and whether you could be among those impacted when filing this year.
Overview of IRS Interest Rule Changes
| Aspect | Details |
|---|---|
| What Happened | IRS paid interest on delayed tax refunds from prior years |
| Why It Matters | That interest is generally considered taxable income |
| Who’s Affected | People who received delayed refunds from IRS between 2020–2021 |
| Key Form to Look For | Form 1099-INT (issued by the IRS) |
| Minimum Reportable Interest | $10 or more |
| Tax Filing Impact | Could increase reported income and tax liability |
What changed this year
In typical years, the IRS does not pay interest on refunds that are issued promptly. However, during the COVID-19 pandemic, widespread disruptions led to processing delays across the board, leaving taxpayers waiting for months — in some cases, over a year — for their federal income tax refunds.
Under longstanding rules, the IRS is required to pay interest if a refund is issued more than 45 days after the return was filed. As such, many of the delayed refunds that went out in 2020 and 2021 included a few extra dollars in the form of **interest income** — and that amount must now be reported on tax returns as **taxable income**.
For tax year 2023, this comes into play because many individuals missed reporting the income in prior years, or the IRS only now completed certain closed cases. Form 1099-INT, which reports interest income, is being sent out by the IRS to affected households. And millions might be surprised to see those forms dropping into their mailboxes in early 2024.
Who qualifies and why it matters
You may be impacted if:
- You received a delayed federal tax refund in 2020 or 2021
- You earned $10 or more in interest on that refund
- The IRS issued you a Form 1099-INT
Taxpayers who fit the criteria are now legally obligated to report the interest income and may need to make adjustments to their filings. This can result in **higher taxable income**, potentially bumping taxpayers into a slightly higher bracket, or even triggering interest penalties if previously unreported income now exceeds IRS thresholds.
Even if the interest amount was small — say $15 or $45 — not including it could trigger a **letter from the IRS** in the future or result in a corrected 1040 filing. It’s best to handle this proactively now rather than risk scrutiny or additional penalties later.
How to handle IRS refund interest on your taxes
If you received a Form 1099-INT from the IRS with “Department of the Treasury – Internal Revenue Service” listed as the payer, you’re required to enter that amount in your 2023 return as **interest income**.
Here’s what to do:
- Locate and review your Form 1099-INT.
- Check Box 1 on the form: This shows the amount of interest earned.
- Report the amount on Line 2b of your Form 1040, titled “Taxable Interest.”
- If you use tax software, enter it when prompted about Form 1099-INT.
- Double-check that the TIN (Taxpayer Identification Number) matches yours.
This process is relatively effortless if the IRS form is accurate — but checking your returns from 2020 and 2021 may help provide clarity on exactly when and how the refund was paid.
Expectations vs. reality: Why taxpayers are caught off guard
Many taxpayers assume that if they already received their refund, they’re done with that year’s taxes. But with the unique provisions of IRS backlogs and pandemic-era legislation, that may not be the case.
According to IRS reports, over 12 million taxpayers received delayed refunds in 2020 alone — meaning the number of households potentially liable for forgotten interest could be even higher than anticipated. What’s more, many taxpayers never noticed the small sums of interest tucked into their refunds, making it even less likely that they reported it appropriately when filing past returns.
“We’re seeing confusion because people don’t remember ever receiving interest on their refund. Many saw a lump-sum deposit and assumed it was all the refund itself.”
— Laura Goodman, CPA and Tax Specialist
The surprise nature of this issue has prompted fresh scrutiny on how timely IRS correspondence reaches taxpayers. Some are only now learning they owe taxes on interest from refunds received over two years ago.
Are penalties or audits possible?
Most taxpayers won’t face severe consequences if they report the income this year. However, failing to do so when a Form 1099-INT has been filed with your SSN can trigger matching errors in the IRS system. That could result in flags, adjustment letters, or — in rare cases — audit assessments.
Although penalties for such small amounts are typically low, they can snowball if combined with other tax oversights. It’s important to be vigilant and timely, especially given recent IRS hiring increases and stepped-up enforcement under increased funding provisions.
Winners and losers from the IRS interest twist
| Group | Impact |
|---|---|
| Taxpayers who report the interest | Stay compliant, avoid penalties — minor increase in taxable income |
| Taxpayers who ignore Form 1099-INT | Risk IRS notices, interest on unpaid taxes, or amended filings |
| Tax preparers and software platforms | Increased demand for guidance and verification services |
| IRS budget and enforcement teams | Improved tracking of income matching, training enforcement algorithms |
Tips to avoid surprises in future tax years
Being proactive about tax documentation can prevent these types of issues down the road. Here are a few tips:
- Always track IRS correspondence throughout the year
- Open any IRS mail promptly — even long after tax season
- Keep a digital and physical copy of any 1099 forms you receive
- Use tax software or advisors to help flag uncommon income types
- If you anticipate refund delays, bookmark the possibility of interest being added
What happens if I already missed reporting it?
If you missed reporting interest income in a prior year and just realized it, it may not be too late to file an amendment using Form 1040-X. However, if the amount was under $10, it might not require action — although keeping records is still a good idea.
Short FAQs on IRS Interest on Refunds
What is IRS refund interest, and why did I get it?
IRS refund interest is money paid to you by the IRS if your refund was delayed beyond a statutory waiting period. The IRS pays this interest to compensate for the delay.
Do I need to pay taxes on refund interest?
Yes, any interest income paid by the IRS in excess of $10 must be reported as taxable income on your federal return.
What form shows my IRS interest income?
You’ll receive a Form 1099-INT from the IRS, showing any interest paid. Make sure to include the amount noted in Box 1 of this form on your tax return.
What happens if I ignore a Form 1099-INT?
The IRS receives a copy too and may send you a notice if your return doesn’t match their records. It could result in additional taxes and penalties.
I already filed my return — what should I do?
File an amended return using Form 1040-X as soon as possible if you failed to report interest income that required disclosure.
Will this affect my state taxes too?
It might. Many states use federal adjusted gross income (AGI) as a starting point for state taxes, so added interest income may affect state liability as well.
Are there other instances where the IRS pays interest?
Yes, the IRS also pays interest when correcting overpayments or during litigation holdbacks, although these are less common scenarios than refund delays.
Can I contest the amount on Form 1099-INT?
If you believe the figure is incorrect, contact the IRS right away and maintain a documented record of your communication in case an adjustment is needed.
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