If you’re still missing your tax refund, you’ll soon receive 7% interest from the IRS — but it’s taxable

If your tax refund is still in limbo, there’s good news: Your balance may be accruing interest, and the rate increases to 7% from 6% on Jan. 1, according to the IRS.

As of Nov. 18, there were 3.4 million unprocessed individual returns received in 2022, including filings for previous tax years, the agency reported.

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Adjusted quarterly and tied to the federal short-term rate, the 7% interest applies to pending refunds and unpaid tax balances.

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“It’s a big jump,” said Sheneya Wilson, a certified public accountant and founder of Fola Financial in New York, noting the rate has more than doubled since January, when it was 3%.

Typically, the IRS has 45 days after the tax-filing deadline to process your return and issue a refund. After that, your “overpayment” starts to accrue daily compounding interest.

Although 7% interest is more than you’ll earn from savings accounts or the new rate for Series I bonds, there’s a downside — IRS interest is taxable.

During the fiscal year 2021, IRS interest payments grew to $3.3 billion, a 33% increase from 2020 for individual returns, the U.S. Government Accountability Office reported in April.

While 7% interest is a small boost if you’re still waiting for a tax refund, the new rate also makes unpaid balances more costly, Wilson said.

“You never want to be negligent when it comes to the IRS,” she said, explaining there are penalties on top of the interest that accrues after the tax deadline.

The late-filing penalty for federal taxes is 5% of your unpaid balance per month or part of a month, capped at 25%, and the late payment fee is 0.5%.

However, if you’re wrestling with a sizable tax balance, you may have options, Wilson said.

With a balance of $50,000 or less, including tax, penalties and interest, you can set up an installment plan online, but you’ll have to call the IRS for larger amounts, she said. However, you’ll still accrue penalties and interest until the balance is paid off.

Another option, known as an offer in compromise, may allow you to settle for less than you owe if you have gone through some type of financial hardship, Wilson said. “Usually they’re going to request a down payment but the remaining balance can still also be paid over time,” she said.