The interest the IRS pays you is taxable income
If the IRS owes you a refund and takes longer than a certain number of days to send it, they pay you interest on that delayed refund. That interest is taxable income — you have to report it on your next tax return, just like interest from a savings account. The IRS will send you a form showing how much interest you received, and you'll add that amount to your other income when you file.
This surprises many people because it feels backwards: the government delayed your money, so why do you owe tax on the interest they paid you for that delay? But the tax code treats all interest income the same way, regardless of where it comes from.
Key Takeaways
- Interest paid by the IRS on a delayed refund counts as taxable income and must be reported on your next tax return.
- The IRS will send you Form 1098-T or a notice showing the interest amount, usually in January or February of the following year.
- You report this interest on your tax return in the section for interest income, which increases your total income for that year.
- The IRS only pays interest if your refund is delayed beyond 45 days from the date you filed or the due date of your return, whichever is later.
- The interest rate changes quarterly and is set by the IRS based on the federal short-term rate plus 3 percent.
How much interest does the IRS pay on delayed refunds
The IRS sets an interest rate each quarter. That rate is the current federal short-term interest rate plus 3 percentage points. Because the federal rate changes, the IRS interest rate changes too — it is higher in some years and lower in others. You can find the current rate on the IRS website, but you do not need to calculate it yourself. The IRS will do the math and tell you exactly how much interest you received.
The interest only starts accruing after 45 days have passed since you filed your return or since the return was due, whichever date is later. If the IRS sends your refund within 45 days, you get no interest. If they take 60 days, you get interest for roughly 15 days. The longer the delay, the more interest accumulates.
When you'll receive notice of the interest amount
The IRS will notify you of any interest paid on your refund. In most cases, they send this information on Form 1098-T or in a separate notice, usually between January and March of the year after you received the refund. Read this notice carefully — it shows the exact dollar amount of interest the IRS paid you.
Keep this notice with your tax records. You will need the interest amount when you file your next return. If you file electronically, your tax software will have a place to enter interest income. If you file on paper, you'll report it on Schedule B (Interest and Ordinary Dividends) or directly on Form 1040, depending on the amount and your filing situation.
How to report the interest on your tax return
When you file your next tax return, you report the IRS interest as ordinary interest income. The exact line depends on which form you use and how much interest you received. If the amount is small (under $1,500 in total interest and dividends), you may be able to report it directly on your main return. If it is larger, you'll use Schedule B.
Your tax software will walk you through this. If you file by hand or work with a tax preparer, show them the notice from the IRS. The interest gets added to your total income for that year, which may increase your tax bill slightly — though the amount of interest is usually small enough that it does not change your tax bracket or create a major impact.
Why this matters for your overall tax picture
Reporting refund interest is straightforward, but it does mean your refund is not entirely "information programs." Part of what you receive is income that you'll owe tax on. For most people, the interest amount is modest — often $20 to $100 — so the tax on it is small. But if your refund was very large and delayed for many months, the interest could be more substantial.
This is one reason some people prefer to adjust their withholding so they do not get a large refund in the first place. A smaller refund means less interest owed and less tax to pay on that interest. But if you do receive a refund with interest, just remember to report it when you file.
What happens if you do not report the interest
The IRS has a record of the interest they paid you — they sent you the notice, and they have it in their system. If you do not report it on your return, the IRS will likely catch the discrepancy when they match your return against their records. This could trigger a notice asking you to explain the missing income, or the IRS may straightforward add it to your income and send you a bill for the additional tax owed plus any penalties.
It is much simpler to report it correctly the first time. The amount is small, the process is straightforward, and you avoid any back-and-forth with the IRS.
Frequently Asked Questions
Can I avoid paying tax on refund interest by not cashing the check?
No. Once the IRS pays you the interest, it is income, whether you deposit the check or not. The tax obligation exists the moment the interest is credited to you. Not cashing the check does not erase the income or the tax you owe on it.
What if the interest amount on the notice seems wrong?
Contact the IRS directly with your notice and explain your concern. You can call the IRS at the number on your notice or visit an IRS office. Bring documentation of when you filed and when you received your refund. The IRS can review the calculation and correct it if there was an error.
Does refund interest count toward the standard deduction or affect my tax bracket?
Yes, it is added to your total income for the year, so it counts toward your adjusted gross income. Depending on how much interest you received and your other income, it could push you into a higher tax bracket, though this is rare with typical refund interest amounts.
If I get a refund every year, do I pay tax on interest every year?
Only if the IRS delays your refund beyond 45 days in that particular year. Many refunds are processed within 45 days and earn no interest. You only report interest in the years when you actually receive it.