Should I overpay the IRS? Why it can trap your cash

"Should I overpay the IRS?"

I get this question almost every day. Many people like the idea of a big refund. It feels safe. But overpaying can backfire, especially if you already owe back taxes.

If you owe back taxes, your refund may never reach you

When a client owes the IRS or a state and the debt is still being worked out, the tax agency usually won't send a refund for an overpayment on the current return. It generally applies the refund to the old balance.

So while a long-term solution is still being approved, overpaying can trap cash you thought you'd get back. For someone already stretched thin, that can hurt.

A late return can cost you the refund

I recently took on a wealthy client who overpaid his state income taxes by over $100,000. He sent the returns by registered mail and asked for a substantial refund.

The state is refusing to return the overpayment because the return wasn't filed on time.

Refunds come with deadlines. Miss them, and the money may not come back at all, no matter how much it is.

The IRS is not a bank account

People sometimes treat the IRS like a savings account. What's the upside of parking extra money there?

If your return gets flagged for identity verification, a math error or an audit, the IRS can hold the refund for months. Your cash is out of reach while you wait.

What about interest?

The IRS does pay interest on overpayments. For individuals, the rate is 7% for the fourth quarter of 2026.

But there's a catch. The IRS generally pays no interest if it issues your refund within 45 days of the return due date or the date you filed, whichever is later. So in the normal processing window, your money earns $0. It just sits there, when it could be in a high-yield savings account or a CD, where you still control it.

A small cushion can make sense

There's one caveat. A small cushion can be reasonable, so you're not short and racking up penalties and interest for underpaying. In my experience, something up to about 10% of your projected tax is a sensible range for many people.

Overpaying a little to stay safe is different from turning the IRS into your savings account.

What to do instead

• If you owe back taxes, talk to someone before overpaying. The money may simply go to the old debt.

• File on time. It protects your right to a refund and keeps penalties down.

• Estimate carefully. Pay what you need to stay safe, plus a modest cushion.

• Keep the rest where you control it. Your bank account can't be frozen by an identity check.

Short FAQ

Will the IRS keep my refund if I owe back taxes? Generally, yes. Refunds are usually applied to past-due federal tax first.

Does the IRS pay interest on refunds? Yes, but generally not if the refund is issued within 45 days of the later of the due date or the filing date.

Is it bad to get a big refund? Not always. But a big refund means you gave the government money you could have used during the year.

What if my refund is stuck? It may be held for identity verification, an error or an audit. If the IRS has your refund tied up, I can look at your account and see why.

Owe back taxes, or have a refund stuck?

Book a free 30-minute call to go over your case. For a quick question, you can call (718) 510-3166. I'll tell you straight where you stand.

General info, not advice for your specific case.