Interest that the IRS must pay you on overpayments of tax to them

By | December 6, 2015

What happens when you overpay the IRS?

Interest is paid by the government on overpayments, whether refunded or credited against tax liabilities for other years, at three percentage points above the federal short-term rate, rounded up to the nearest full percent—the same rate that applies to underpayments. However, this is a little different For corporate taxpayers the interest rate on overpayments is one percentage point below the rate used to compute interest payable on underpayments. However, if the overpayment by a corporation for a taxable period exceeds $10,000, the interest rate is reduced to 0.5 of a percentage point above the federal short-term rate.


When does the IRS start paying interest on overpayments?

Interest is computed from the date of the overpayment, defined by the regulations as the date when the first amount is paid that, when added to previous payments, exceeds the tax liability (including any interest, additions, or additional amounts).


Calculating Interest on Tax Overpayments

Amounts paid before the return is due, payments of estimated tax, and credits for amounts withheld from wages are treated as paid on the last day prescribed for the filing of the return; hence, they do not bear interest between the date of actual payment and the date when they are credited against the tax shown on the return.

Tax Overpayment Credit

An overpayment that is credited against tax liability for another period bears interest until the due date of the amount against which it was credited; but if the credit is applied to the following year’s estimated tax, interest is not allowed.


How does the IRS refund overpayments and interest payments to taxpayers?

When refunding overpayments, the IRS is allowed an interest-free grace period of forty-five days from the due date of the return (or the filing date, if the return was filed after the due date), determined without regard to extensions. If the refund is not paid within this period, however, interest runs in the taxpayer’s favor from the due date (or the filing date, if later) of the return until a date, determined by the IRS, not more than thirty days prior to the refund check. Similarly, if the IRS receives a timely administrative request for a refund and pays the refund within forty-five days of filing, interest on the refund stops running on the day the refund request was filed; and if a refund results from an audit, forty-five days are subtracted from the period with respect to which interest is due.

Cannot Invest with IRS

Laws prevent taxpayers from earning interest on their spare cash by merely dumping money as taxes on the IRS of amounts not computed in pursuance of the actual or reasonably apparent requirements of tax laws