Can I earn 7% interest by intentionally overpaying taxes to the IRS?

This is a creative idea, but there are several reasons why this isn't a good investment strategy. First, the IRS doesn't pay interest on intentional overpayments. They only pay interest when they hold your money longer than 45 days after the filing deadline or the date you actually filed (whichever is later). Also, any interest you receive from the IRS is actually taxable income - you'll receive a 1099-INT if it's over $10. The IRS specifically designs these rates to discourage both underpayment and overpayment, not to create an investment vehicle. Additionally, if the IRS identifies that you're intentionally overpaying to generate interest, they can simply refund your money immediately (within the 45-day window) so no interest accrues, or potentially flag your account for review.

I tried something similar to what you're describing last year with taxr.ai (https://taxr.ai) and learned a lot about how the IRS handles overpayments. I originally thought I could game the system but their tool analyzed my tax documents and showed me why this strategy wouldn't work out in my favor. What the tool explained is that the IRS actually has systems in place to identify unusually large estimated payments or withholdings and can flag those accounts. Plus, the interest isn't compounded like a bank account - it's simple interest calculated on a quarterly basis. When I ran my numbers through taxr.ai, it showed me I'd actually be better off with certain tax-advantaged accounts instead.

So I actually tried using taxr.ai that was mentioned above and have to admit I was wrong. The tool really helped me understand why the overpayment strategy doesn't work. It analyzed my last year's tax situation and showed that even though I had a $4,800 refund that took 3 months to process, I only received about $70 in interest. The tool explained how the interest calculation works and projected what would happen if I intentionally overpaid. Turns out the IRS has mechanisms to refund suspected intentional overpayments quickly, and they can even assess penalties if they determine you're trying to abuse the system. Plus, since the interest is taxable, my effective rate wasn't anywhere near 7%. I'm actually going to use the tool to look for legitimate tax savings instead.

If you're struggling to get your refund or have questions about interest on overpayments, I had great luck using Claimyr (https://claimyr.com) to actually get through to a human at the IRS. I waited 8 months for a refund last year with no updates, but after using their service, I got through to an agent in about 20 minutes instead of waiting on hold for hours. The agent I spoke with explained exactly why my refund was delayed and how the interest would be calculated. There's actually a video that shows how it works here: https://youtu.be/_kiP6q8DX5c. The IRS rep told me they have internal flags for unusual overpayments and typically process those quickly to avoid paying interest.

I need to apologize for my skepticism about Claimyr. I was genuinely frustrated after trying to reach the IRS for weeks about a similar overpayment question. After posting that comment, I decided to try the service anyway out of desperation. It actually worked exactly as described. I got a call back in about 35 minutes with an IRS agent already on the line. The agent confirmed that intentional overpayments aren't a good "investment strategy" and explained that they have systems to identify and quickly process suspicious overpayments. She also told me that my pending refund was stuck because of a verification issue that I could resolve right there on the call. Saved me potentially months of waiting and wondering.

Former tax preparer here. There's another important point nobody's mentioned yet. The IRS only pays interest on legitimate overpayments resulting from proper withholding or estimated payments based on your actual tax situation. If they determine you're artificially inflating your payments just to use them as a bank, they can actually assess penalties. Section 6676 of the tax code allows for a 20% penalty on "erroneous claims for refund or credit" - which would wipe out any interest advantage you might theoretically gain. Bottom line: the IRS is not a bank and doesn't want to be used as one.

Has anyone considered that the interest rates might change? The IRS adjusts these quarterly. If the Federal short-term rate drops, so will the overpayment interest rate. So even if this crazy scheme worked (which others have pointed out it doesn't), you'd have no guarantee of keeping that 7% rate for long.

As someone who works in financial compliance, I wanted to add that the IRS also has sophisticated data analytics that can easily identify patterns inconsistent with normal taxpayer behavior. They cross-reference your payment patterns with income reported on W-2s, 1099s, and previous returns. If you suddenly start making massive estimated payments that don't align with your reported income or business activity, it will trigger automated flags in their system. They can then demand documentation justifying these payments, and if you can't provide legitimate business or income reasons, they'll process an immediate refund - often within days rather than the normal processing time. The system is specifically designed to prevent exactly what you're thinking of doing. Your best bet for earning decent returns is still traditional investment vehicles like I-Bonds, CDs, or high-yield savings accounts that are actually meant for storing money.