What Happens To Your Tax Refund When You File Late

With the winter holidays officially over and the Super Bowl right around the corner, it's that time of the year again to start thinking about filing your income tax return. The IRS recently announced that early-bird filers will be able to submit their documents as early as January 27, 2025. However, that's provided that you live in one of the 25 states that participates in the Direct File program, which are listed in the agency's press release. 

Just as there will be over-eager early filers, so too will some folks require additional time to file their federal tax returns. Whether it's because of missing documents, a busy schedule, or good ol' fashioned forgetfulness, the good news is that an additional six months or longer is yours for the taking. Note that if you owe money to the IRS and won't make the normal filing deadline, which is typically April 15, you're required to submit Form 4868 to get a six-month reprieve. 

Along with the extension form, you'll also need to make an educated guess about how much is owed, then submit that payment, or as much as possible, along with the extension form. Failure to pay in April, even if you don't file a return until October, is punishable with both fines and interest in addition to any amount owed. However, what if the script is flipped and you're late filing, but the IRS actually owes you money in the form of a refund? Let's take a closer look.

Did you know that a full 75% of taxpayers receive a refund from the IRS annually? If you're part of that group, you technically don't need to file a return or ask for a six month extension by April 15. There's absolutely no penalty for doing nothing. However, you'll also not receive any 2025 tax refund that's owed to you by Uncle Sam until you file the proper documents.

While it might feel good to ghost the IRS indefinitely, it's not a good idea. To begin with, income tax refunds are forfeited after three years. For example, if you fail to file a tax return in April 2025, your unclaimed tax refund will be turned over to the U.S. Treasury in April 2028. Even if you don't wait years to file a return and claim your refund, you're still giving the government a tax-free loan in the meantime. That's because taxpayers don't receive any sort of interest on income tax refunds that remain in limbo. Meanwhile, that's money that you could be growing through investing. 

Consider that the best high-yield savings accounts are currently paying approximately 4.75% annual percentage yield (APY). Since the average tax refund amount is about $3,000, that equates to missing out on $142 worth of interest in one year. The impact of not receiving your income tax refund is even more bleak when you ponder investing in the S&P 500 stock index, which returned an average of 10% annually since 1957. Finally, perhaps you could use your refund to pay off credit card debt, which frequently carries an interest rate of 20% or more. 

In short, your federal tax refund isn't at risk of loss from late filing for a period of three years. However, there is a missed opportunity cost to filing late and delaying receipt of your hard-earned money. Also keep in mind that electronically-filed tax returns are only accepted until approximately November, which coincides with the duration of a six-month filing extension. After that, you'll need to submit actual paper documents by mail. 

Also note that tardy filers who are expecting a refund may want to file a form 4868 extension anyway, even though it's not required. If it turns out that your calculations are flawed and you do owe money to the IRS after all, filing the extension will at least protect you from failure to file penalties, though there will be other consequences.

Finally, the information presented here only pertains to late filing of federal income tax returns. If your state collects income tax, the fate of your refund due to late filing may vary. While outlining each state's policy is too vast for the scope of this article, you can start your research with a list of state government websites that the IRS helpfully provides.