Interest on tax overpayments: rates, start dates, and the tax on the interest

When a taxpayer overpays, the government pays interest. Section 6611 grants it; Section 6621 sets the rate quarterly at the federal short-term rate plus 3 percentage points for individuals, plus 2 for corporations — and only plus 0.5 (the "GATT rate") on the corporate overpayment slice above $10,000. Interest generally runs from the later of the return's due date or the payment date, compounds daily, and stops a few days before the refund check. That is why a research-credit refund claimed by amended return for a three-year-old tax year arrives noticeably larger than the credit itself.

Two catches: the IRS gets a 45-day interest-free window to process refunds, and the interest it does pay is taxable income.

Rates: not one rate but three

Illustrative Section 6621 overpayment rates, assuming a 5% federal short-term rate:

Individuals and passthrough owners (+3)8%

Corporations, first $10,000 (+2)7%

Corporate excess over $10,000 (GATT, +0.5)5.5%

Illustrative; actual rates are set quarterly by the IRS under Section 6621 and compound daily.

The GATT rate is the number that matters for any six-figure corporate refund: nearly the entire balance earns the short-term rate plus half a point. Note the asymmetry with what the government charges — underpayment interest runs at plus 3 (plus 5 for large corporate underpayments), so a corporation simultaneously owing and owed pays more than it earns, which is what makes interest netting under Section 6621(d) worth pursuing where both run in the same period.

When does the clock start — and pause?

For an overpayment shown on an original return, interest runs from the return's due date, but Section 6611(e) gives the IRS 45 days from the later of the due date or filing to refund with no interest at all. Most routine refunds beat the window; no interest.

Amended returns are different. The overpayment existed all along — the tax was paid with the original return — so interest accrues from the original due date, not from the amended filing. Claim a 2022 credit in early 2026, within the refund statute of limitations, and the refund carries roughly four years of daily-compounded interest. The 45-day grace period restarts from the amended filing, and for refunds attributable to carrybacks, interest runs only from the end of the loss or credit year, not the year carried back to — a trap in Section 39 carryback claims. Returns filed late start the clock at actual filing; a return must also be processible to accrue interest.

Statutory anchors: Section 6611 at uscode.house.gov, with the mechanics in the regulations under §301.6611-1 at eCFR Title 26.

The interest is income

The refunded federal tax is not income — it is your money back. The interest is: ordinary interest income, taxable in the year received, reported by the IRS on Form 1099-INT at $600 or more. For a corporation, that means a refund driven by an amended-return credit study produces a taxable item the following year that the study's benefit projection probably omitted. State refund interest follows the same logic under state law. Model it; a four-year interest tail on a $500,000 refund is real money and real tax.