Tax question

[aurielle]

We finally got our tax refund a couple days ago. (yes we filed in April) Anyway, it took the IRS so long to process our return that they paid us interest on our refund. My question is, do we have to pay taxes on the interest that the IRS paid to us? Ironic, isn't it?

[kork13]

Sadly, I think you might (technically).... I once got paid interest from Oregon, and then come February or March (forget exactly when, but it was seriously right after I had filed my taxes, they sent me a letter with some kind of 1099-equivalent showing the $1.xx interest they gave me, as if expecting me to report it on my already-filed taxes, so they can get their $0.12 of the pie back from me. Clearly, I laughed at them and ignored it. Haven't had the IRS on my butt for it so far (not for that at least... another issue, not so much, unfortunately).

So in any case, it probably isn't really a big deal. It would only possibly get noticed if you were to be audited, and unless there was a glaring error on your return (i dunno... like having your SSN being claimed as a solo filer on one return and as a dependent on somebody else's... not that i know anything about that....), the chance is very low that most middle-income families will be audited. It just costs the feds too much money to only get an extra couple hundred dollars in revenue.

[aurielle]

Yeah I kinda suspected that we'll probably have to pay taxes on the interest. I'll make sure DH lists it with the other interest income when we file.

I had to laugh when I thought about it though. Isn't it ironic?? The IRS giveth and the IRS taketh away.

[MonkeyMama]

Yes, the interest is taxed.

P.S. If they sent you a 1099 it WILL get noticed. They are just VERY back logged. (Meaning, they might notice 3 years later and charge penalties and interest. Just FYI).

Though if it's pennies, yeah, I wouldn't sweat it.

[Caoineag]

Oh yes, I had this. I got to amend my return that year because the fed's didn't send me their 1099 until March. That year I was having a lot of problems with 1099's though (my non profit employer issued 4 different ones, gah) so I just waited until April to redo it.

[jIM_Ohio]

If you receive a state tax refund and deduct state taxes on schedule A, that refund is reportable as income the following year.

Example- file 2007 tax return in april of 2008, receive state refund in june of 2008, that refund is taxable when I file 2008 taxes in April of 2009.

If you claim state SALES taxes on schedule A and receive a state refund, that refund is NOT taxable the following year.