IRS paid $3B in interest to taxpayers for late refunds in 2020: GAO report

IRS officials paid a record amount of interest on tax refunds last year as a result of the COVID-19 pandemic and a decision to allow taxpayers extra time to file their tax returns, according to the Government Accountability Office (GAO).

A report from the agency released this week found that the IRS spent more than $3 billion on tax refund interest last year, a figure that dwarfed 2019’s total and was attributed in the report to the number of paper returns the IRS received while many of its employees were working remotely, which led to delays. The GAO in its report faulted the IRS for not doing more to reduce the number of paper returns it receives annually.

“IRS’s overall 2020 performance was significantly impacted by its reliance on manual processes such as for paper returns, and its limited ability to process returns remotely while processing centers were closed,” read the GAO report.

“GAO also found that about 23 percent of business tax returns were filed on paper even though an e-file option is available. IRS has not comprehensively identified barriers to business-related e-filing nor taken specific actions to increase e-filing,” the report continued.

The record $3.03 billion far exceeds the roughly $2.06 billion paid by the agency in tax refund interest in 2019. In addition to the large number of paper returns the agency received, the figure was also blamed on the IRS being restricted to paying refunds within 45 days after the traditional April 15 filing deadline, which last year was extended due to the COVID-19 pandemic. Because some taxpayers filed after April 15, the IRS had in many cases far less than the traditional 45 day period to send out refunds before interest was accrued on those payments.

The agency still faces a backlog related to 2020 tax returns, according to the report.

“When IRS began re-opening processing centers in late April, employees faced a significant backlog of paper-based and manual work including unopened mail, unprocessed tax returns, and suspended returns that required manual review before IRS could process them and issue a refund. Since then, IRS has made progress in addressing parts of its backlog,” the report found.

The report’s release comes as 2021’s tax season has begun; the IRS moved this month to extend the tax filing deadline for residents of Texas affected by devastating winter storms, but has yet to issue a similar deadline extension for the country at large in response to the ongoing COVID-19 pandemic.