Congress quietly makes IRS refund interest tax-free for individuals and small businesses

What it does

This bill excludes from taxable income any interest that the IRS pays to individuals and small businesses when they overpay their taxes. Currently, when the IRS refunds an overpayment with interest, that interest is treated as taxable income. This bill makes that interest tax-free for individuals and small businesses, reducing their tax liability on the refund itself.

Why we flagged it

The bill's sole operative mechanism is a narrow tax exclusion — it removes interest income from the taxable base for a specific class of taxpayer (individuals and small businesses) in a specific circumstance (IRS overpayment refunds). This is a straightforward tax relief provision.

What the text implies

• The exclusion applies only to individuals and small businesses (defined by reference to IRC § 44(b)(1)); large corporations and partnerships remain taxed on overpayment interest, creating a two-tier system.
• The bill does not define 'eligible small business' in its own text — it cross-references § 44(b)(1), which is the Work Opportunity Tax Credit definition. The scope of the benefit depends entirely on that external definition.
• Revenue impact is likely modest but unquantified in the text; the IRS does not pay interest on overpayments frequently or in large amounts, but the cumulative effect across millions of small refunds could be material.

Section numbers refer to the bill text the analysis read — linked under Primary records below.

Who it affects

Individuals and small businesses keep more of their own money when the IRS returns overpayments with interest. The benefit is direct and broadly available to any taxpayer who overpays, with no offsetting public cost identified in the text.

Who stands to gain

• individuals receiving tax refunds with interest
• small businesses receiving tax refunds with interest

Named in the bill

Internal Revenue Service (IRS), Internal Revenue Code of 1986, IRC § 6611 (interest on overpayments), IRC § 44(b)(1) (Work Opportunity Tax Credit definition), IRC Part III, Subchapter B, Chapter 1

Where it stands

1 cosponsor: 1 Republicans.

• Jul 29, 2025 — Introduced · Congress.gov: “Introduced in House”
• Jul 29, 2025 — Referred to House Committee on Ways and Means · Congress.gov: “Referred to the House Committee on Ways and Means”

Dates and quoted wording are Congress.gov's action record; the timeline shows status changes, not every procedural step.