U.S. Sen. Marsha Blackburn (R-TN) on Jan. 7 sponsored legislation that would ensure interest paid by the Internal Revenue Service (IRS) to taxpayers who prevail in an audit or tax-related litigation is not treated as taxable income.
The No Tax on Wrongful Delay Act of 2026, S. 3587, would amend the Internal Revenue Code of 1986 to provide the exemption from gross income for interest the IRS paid to taxpayers, according to the bill’s text.
“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,” Sen. Blackburn said. “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.”
The legislation would provide that interest paid on tax overpayments is not considered gross income if the overpayment results from an IRS audit or examination; a lawsuit or proceeding brought by the taxpayer to obtain a refund or credit; or a civil action brought by the United States to collect taxes.
The U.S. Senate Finance Committee is considering the bill, which if enacted would apply to taxable years beginning after Dec. 31, 2025.