Submitted by Richard Allen, EA, AFSP
The IRS just issued IR-2020-183 (see attached) on August 18, 2020.
The IRS announced that they are sending interest payments of 2019 1040 return refunds to about 13.9 million taxpayers. Through the end of July 2020 over 152 million 1040 returns have been filed for 2019. Nearly 10% of these taxpayers will be receiving interest on their 2019 refunds. These interest payments will average about $18.
About 12 million of these interest payments will be direct deposited. The rest will receive an interest check saying INT Amount.
The interest payments, averaging about $18, will be made to individual taxpayers who filed a 2019 return by this year’s July 15 deadline and either received a refund in the past three months or will receive a refund. Most interest payments will be issued separately from tax refunds.
By law, these interest payments are taxable and taxpayers who receive them must report the interest on the 2020 federal income tax return they file next year. In January 2021, the IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10.
Normally, the IRS is to add interest to refunds on timely-filed refund claims issued more than 45 days after the return due date (April 15 or an extended due date, if an extension had been filed). Instead, this year’s COVID-19-related July 15 due date is considered a disaster-related postponement of the filing deadline. Where a disaster-related postponement exists, the IRS is required, by law, to pay interest, calculated from the original April 15 filing deadline, as long as an individual files a 2019 federal income tax return by the postponed deadline – July 15, 2020, in this instance. This refund interest requirement only applies to individual income tax filers – businesses are not eligible.
The interest rate is 5% through June 30, and 3% starting July 1 2020.
WHAT DOES THIS MEAN FOR TAX PRACTITIONERS?
1. Your clients will be getting a small interest payment soon (most by direct deposit into the same account as the original tax refund). They may call you as their preparer for an explanation.
2. They will get a 1099-INT in January 2021 from the IRS if the interest is at least $10. They may call you again for an explanation. Or, they may overlook bringing the 1099-INT from the IRS for the return preparation.
3. The client needs to report any interest received from the IRS as interest income on Schedule B or the Taxable Interest line on the 2020 Form 1040.
4. This IRS interest is considered US Treasury Obligation Interest, and should be coded as such on tax software to be subtracted on the state income tax return for 2020.