U.S. Senator Marsha Blackburn (R-Tenn.) introduced legislation Wednesday aimed at ending what she describes as an unfair penalty on taxpayers who successfully challenge the Internal Revenue Service (IRS).
The proposed “No Tax on Wrongful Delay Act” would prevent the federal government from levying income taxes on interest paid to taxpayers who win an audit or tax-related litigation. Under current law, if the IRS holds a taxpayer’s money and later refunds it with interest following a dispute, that interest is considered taxable gross income.
Blackburn argues that if the agency was in the wrong, the government shouldn’t get a cut of the compensation.
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“The American people should not be forced to pay income taxes on the interest they are owed from the IRS when they prevail in an audit or in court,” Blackburn said in a statement. “The No Tax on Wrongful Delay Act would protect taxpayers and ensure that interest paid on overpayments resulting from audits, refund actions, or IRS collection cases is not taxable income when the IRS gets it wrong.”
If enacted, the bill would amend the Internal Revenue Code of 1986 to explicitly exclude this specific type of interest from gross income. The exemption would apply to interest paid on tax overpayments resulting from:
- An IRS audit or examination;
- A lawsuit filed by a taxpayer to secure a refund or credit; or
- A civil action brought by the United States government to collect taxes.
The legislation is slated to apply to taxable years beginning after December 31, 2025. The bill has been read twice and referred to committee for further consideration.
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