The IRS counts refund interest as taxable income on your next return

When the IRS pays you interest on a delayed tax refund, that interest is taxable. You report it as income on the following year's tax return. The IRS sends you a Form 1099-INT in January or February showing the exact amount of interest you received, and you include that figure on your return.

This applies whether your refund was delayed because of IRS processing time, an amended return you filed, or an IRS audit. The interest itself—not the refund—becomes taxable income. The refund money itself is not taxable because it is your own money being returned to you.

The IRS calculates interest on delayed refunds using a rate set by federal law. That rate changes quarterly. For 2024, the rate was 8 percent per year. The longer the IRS holds your money, the more interest accrues, and the more you will owe tax on when you file next year.

Key Takeaways

  • Refund interest is reported on Form 1099-INT and taxed as ordinary income on your next return.
  • The refund itself is not taxable—only the interest the IRS paid you is.
  • The IRS interest rate changes quarterly and was 8 percent annually in 2024.
  • Interest accrues from the original due date of your return until the IRS issues your refund.
  • You cannot deduct the tax you owe on refund interest as a loss or offset.

How the IRS calculates interest on your refund

The IRS begins calculating interest on the date your return was due, not the date you filed it. If you filed early and the IRS took months to process your return, interest runs from April 15 (or the actual due date that year) forward. The interest clock stops on the date the IRS issues your refund check or deposits it to your bank account.

The IRS publishes its interest rate each quarter in the Federal Register. The rate is tied to the federal short-term rate plus 3 percentage points. For individuals, the rate is the same whether the IRS owes you money or you owe the IRS. In recent years, rates have ranged from 3 percent to 8 percent annually.

The IRS compounds interest daily. This means interest accrues on the interest itself as time passes. A refund delayed for six months will generate more interest than a refund delayed for three months, even at the same annual rate.

When you receive the Form 1099-INT for refund interest

The IRS mails Form 1099-INT to you by January 31 of the year following the year in which you received the interest. For example, if you received a refund with interest in 2024, you will receive the 1099-INT by January 31, 2025.

The form shows the interest amount in Box 1 (Interest Income). You report this amount on Schedule B (Interest and Ordinary Dividends) if your total interest income is over $1,500, or directly on Form 1040 if it is $1,500 or less. Either way, the interest is added to your taxable income for that year.

If you do not receive a 1099-INT but you know the IRS paid you interest, contact the IRS at 800-829-1040 or check your IRS account online at IRS.gov. The IRS may have mailed it to an old address, or there may be a delay in processing.

Situations where refund interest is most common

Refund interest occurs most often when you file an amended return (Form 1040-X). The IRS typically takes longer to process amended returns than original returns, sometimes six months or more. During that time, interest accrues on the additional refund you are owed.

Interest also accrues when the IRS audits your return and determines you are owed a refund. The audit process can take months or years. Interest runs from your original due date through the date the IRS issues the refund check.

Processing delays unrelated to errors or amendments can also generate interest. If the IRS simply takes a long time to process your original return, interest begins accruing after a certain point. The IRS generally does not pay interest on refunds issued within 45 days of the return due date, but rules vary by situation.

How refund interest affects your tax liability

Refund interest increases your taxable income for the year you receive it. If you are in the 22 percent tax bracket, for example, and you receive $100 in refund interest, you will owe approximately $22 in additional tax on that interest. This is separate from any tax you already owe on other income.

You cannot offset refund interest against the refund itself or against other income. The interest is treated as ordinary income and taxed at your marginal rate. There is no deduction or credit available to reduce the tax on refund interest.

In some cases, the tax you owe on refund interest can be substantial. A large refund delayed for over a year at 8 percent interest could generate thousands of dollars in interest income, which would then be taxed. This is one reason why filing accurately the first time and following up on delayed refunds matters.

What to do if you received interest but no Form 1099-INT

If the IRS paid you interest on a refund but you did not receive a Form 1099-INT by early February, first check your IRS online account at IRS.gov. Log in with your credentials and look for any notices or documents related to your refund. The IRS may have issued the form but mailed it to an outdated address.

Call the IRS at 800-829-1040 and provide your Social Security number and tax year. Ask whether a 1099-INT was issued for you and request a copy. The IRS can reissue the form or provide the interest amount over the phone so you can report it on your return.

Do not skip reporting the interest just because you did not receive the form. The IRS has a record of the interest it paid you. If you do not report it and the IRS matches its records to your return, you may face an audit notice and penalties for underreporting income.

Frequently Asked Questions

Is the refund itself taxable, or only the interest?

Only the interest is taxable. The refund is your own money being returned to you, so it is not income. However, if your refund came from a tax credit like the Earned Income Tax Credit, that credit itself is not taxable—only any interest the IRS paid on a delayed refund of that credit is taxable.

Can I deduct the tax I owe on refund interest?

No. Refund interest is treated as ordinary income and taxed at your regular rate. There is no deduction, credit, or offset available. You simply report the interest on your return and pay tax on it like any other income.

What if the IRS paid me interest but I think the amount is wrong?

Review the Form 1099-INT carefully. The interest amount should match what the IRS told you when it issued the refund. If you believe the amount is incorrect, call the IRS at 800-829-1040 with your return information and ask them to recalculate. Request a written explanation of how the interest was computed.

Do state tax refunds also pay interest, and is that taxable?

Some states pay interest on delayed refunds, but not all. If your state does, that interest is typically taxable on your state return. A few states exempt refund interest from state tax, so check your state's rules. Federal refund interest is always taxable on your federal return regardless of state rules.

If I owe the IRS money, do I have to pay interest on that too?

Yes. If you owe the IRS and do not pay by the due date, the IRS charges interest on the amount owed at the same quarterly rate used for refunds. That interest is not deductible on your personal return, though it may be deductible if the debt is business-related.