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Any time a taxpayer makes a late payment to the Internal Revenue Service, the agency charges interest in addition to any late-filing fees. The situation does not reverse itself if you file early -- you don't get interest on refunds owed just because you sent your return well ahead of the April 15 filing date. However, if the IRS owes you a refund for overpaid taxes, it will pay you interest under certain circumstances.
The IRS runs a "pay as you go" tax system in which you are subject to regular withholding from your paycheck to keep current on your federal taxes. If you are self-employed, or running a business as a sole proprietor, you make quarterly estimated payments. If the withholding or quarterly payments exceed your tax liability, the IRS will refund the money after you have filed the annual tax return.
The IRS sets a deadline of 45 days from the filing deadline to pay out any refunds. No interest is due on refunds that arrive before the 45-day deadline, which is always counted from filing deadline (April 15 for most individual taxpayers). If you file your return early, the 45-day clock does not start ticking until April 15, giving the agency until May 30 to issue an interest-free refund, if one is due.
If you file after the deadline of April 15, then the 45-day deadline to issue any refunds applies to the date on which you filed. With an extension, taxpayers have until October 15 to get their returns in. With these last-minute returns the agency has until November 30 to send out any refunds.
The IRS also pays refunds on overpayments. If the agency has assessed taxes through a return that it amended, and you later show the assessment is too high, then you have the right to a repayment, plus interest. The rate of interest paid varies with market interest rates. Any interest the IRS pays you is considered taxable income. You will receive a 1099 reporting that income and you must include it on the tax return for the year in which you receive it.
- Form 1040 Tax Forms image by Viola Joyner from Fotolia.com