This paper presents an advanced three-phase four-wire interlinking microgrid system with improved harmonics reduction feature. Due to the robustness and simplicity features, the time-domain second-order notch-filter equivalent techniques have drawn a great deal of research attention. However, the drawbacks of non-satisfactory harmonics rejection characteristics and dynamic response limit their applications. In this context, this paper proposes an advanced control system with an enhanced harmonics reduction feature for a microgrid application. The proposed control system exhibits superior harmonics reduction feature and better dynamic response than the conventional notch-filter based techniques. In addition, a control scheme is developed for a three-phase power system application which presents higher accuracy in compensating both balanced and unbalanced harmonics. The performance of the proposed system is validated through simulations and tested on the hardware of a real microgrid system. From the results, it is evident that the proposed scheme provides excellent performance in terms of harmonics reduction in microgrid systems.