This bill would exempt taxpayers from paying federal income tax on interest payments they receive from the IRS when they win an audit dispute or legal case against the agency. Currently, when the IRS owes a taxpayer money due to an overpayment of taxes—whether after an audit, a taxpayer's lawsuit for a refund, or a government collection case—the interest paid on that refund is treated as taxable income. The bill changes this by allowing taxpayers to exclude this interest from their gross income for tax purposes. The exemption would apply to overpayments resolved after audits, taxpayer-initiated lawsuits for refunds, or IRS collection actions. The law would take effect for tax years beginning after December 31, 2025, meaning it would first apply to the 2026 tax year.
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