The federal government paid taxpayers $10.2 billion in interest payments for delayed tax refunds last year, more than triple what it shelled out just a couple of years ago.
The dramatic run-up in costs reflects the steep rise in interest rates over the past few years, but it is also a marker of the economic toll taken by delayed refunds and the IRS's inability to keep up with its workflow. The agency's struggles, which can harm businesses and families desperate to get their money back, have prompted Democrats to approve vast new funding to increase its workforce, and they have even led to some GOP support for giving it added resources.
Last fiscal year, the IRS sent out nearly 121 million tax refunds , according to the agency. While many people get their refunds on time, those that are late are paid back with interest tied to federal short-term interest rates . The interest rate is recalculated quarterly.
Typically, the IRS, which has been burdened by understaffing and backlogs, has 45 days to process returns and issue a refund. If the tax agency is late, though, those refunds begin accruing interest, costing the government more money and further running up debts and deficits.
That rate was 7% until the fourth quarter of 2023, when it was bumped up to 8%, according to historical data from the IRS. The increase matches a broader rise in interest rates across the board as the Federal Reserve tightened monetary policy over the past few years.
In 2021, the government paid out $3.3 billion in total interest on tax refunds. But in fiscal 2023, that figure ballooned to $10.2 billion in refund interest payouts, according to a report from the Government Accountability Office, which is a government watchdog agency.
Chris Towner, the policy director for the Committee for a Responsible Federal Budget, told the Washington Examiner that it isn’t exactly clear why the figure was so high last year and called the 209% increase from 2021 “striking.” He said that the higher interest rates likely accounted for most of the run-up in costs, but he also noted the agency has suffered from understaffing over the past decade, which could have meant more delayed refunds.
Democrats tried to address the IRS's staffing problems with tens of billions of dollars in new funding included in the 2022 Inflation Reduction Act, which was passed without GOP support and signed by President Joe Biden. Proponents of the move argued that it would help the agency process returns more quickly and deal with pandemic-related backlogs. In previous years, Republican support had been rising for giving the IRS additional funding, a cause supported by former President Donald Trump's Treasury Secretary Steven Mnuchin. A series of high-profile leaks of taxpayer information, however, sapped support on the Right for new funding without major support.
Towner said that it’s possible that some of that bump in interest payments comes from the IRS now finally being able to cut through the backlogs and process some of those older returns.
“I’m curious to see what happens from the fiscal 2024 refunds because I would imagine it's either go drop right back down because they cleared a backlog or maybe this is a new normal,” he said.
Pete Sepp, the president of the National Taxpayers Union, said he thinks taxpayers might be surprised by just how much the government has had to pay out due to these delays. He also noted that delayed refunds have been particularly challenging for households, given the high inflation of recent years.
“It’s not as if these folks are waiting for a lottery payoff,” Sepp told the Washington Examiner. “This is their own money that they could have been using throughout the year, and when they overpay the IRS, it can be a genuine hardship to wait to have to get it back.”
A delayed refund could be particularly troubling for a small business trying to stay current on a loan or for a family that needs to make rent, Sepp added. Having the money in hand could be the difference between security and crisis.
The delays are particularly difficult for low-income earners who benefit from the earned income tax credit, which is an antipoverty program that provides refundable credits to workers. A 2022 study examined the effects of a new law that went into effect in 2017 and required the IRS to spend extra time processing early EITC claims, resulting in longer delays.
The study found that early filers experienced more food insecurity relative to later filers after the law went into effect. In other words, delays in expected tax benefits do have material effects on households.
Notably, the $10.2 billion in interest payments on delayed refunds is beginning to approach the IRS’s. For context, in fiscal 2023, appropriations accounted for $12.3 billion of the IRS budget.
“I mean, that’s pretty big,” Sepp said.
In the GAO report, which was sent to IRS Commissioner Daniel Werfel, the agency includes several recommendations on how to help the federal government save money and improve government operations. Among those was to decrease the amount of refund interest.
The report said the IRS agreed with the recommendation and indicated that it has been working to reduce such payments tied to the pandemic-related backlog of returns. The IRS has been hiring more staff and using automation to improve processing timeliness, according to the GAO.
“However, this alone will likely not reverse the annual growth of refund interest payments, which have increased since fiscal year 2015,” according to the report.
“Without identifying, monitoring, and reporting on the primary reasons for refund interest payments, and associated dollar amounts, IRS is not in a position to ensure that any steps it takes in response to this recommendation directly affect any reduction in refund interest payments,” the report added.
While the $10.2 billion in interest payments are but a drop in the bucket compared to the $6.1 trillion in government spending in fiscal 2023, they are yet another reminder of the precarity of the government's fiscal footing.
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