A total of more than $510 million in refunds were recently sent by the Internal Revenue Service to taxpayers whose unemployment compensations are not included in income for the tax year 2020.
Most affected taxpayers will be able to avoid filing an amended return following the IRS’s efforts to fix unemployment compensation overpayments. According to IRS data, the adjustment may be available to over 16 million taxpayers so far. Overpayments in some cases will be refunded; in others, overpayments will be applied to taxes owed or other obligations.
The American Rescue Plan Act (ARPA) of 2021, passed in March, exempts taxpayers from unemployed compensation up to $10,200 paid in 2020. In this case, $10,200 represents what is excluded from one’s adjusted gross income (AGI); it does not represent the amount of a refund.
Earlier this year, the IRS began investigating tax returns filed before ARPA was enacted in order to identify unemployment compensation that is excludible. There have been over 11.7 million refunds issued to date, totaling $14.4 billion. More than 519,000 returns were affected, resulting in 430,000 taxpayers receiving average refunds of $1,189 each.
As the IRS already reviewed the simplest returns, it is now focusing on more complex returns. The re-review of returns and processing corrections will soon be complete. An additional set of corrections is planned to be delivered by IRS by the end of the year.
Within 30 days of the adjustment, impacted taxpayers will receive a letter from the IRS, indicating what adjustments were made and the amount of the adjustments.
Similarly, corrections are being made to Earned Income Tax Credit, Additional Child Tax Credit, American Opportunity Credit, Premium Tax Credit, and Recovery Rebate Credit amounts that are impacted by the exclusion. It is not necessary for most taxpayers to take any action or to contact the IRS.
It is believed that the IRS will send notices in November and December to individuals who haven’t claimed the Earned Income Tax Credit or the Additional Child Tax Credit and are now eligible for these credits.
The notices do not imply that the taxpayer qualifies for these credits, and if the taxpayer qualifies, they will need to respond to the notice rather than file an amended return.
When a taxpayer becomes qualified for other credits or deductions after the exclusion was calculated, but it was not claimed on their original return, the taxpayer must file Form 1040-X, Amended U.S. Individual Income Tax Return, in order to claim the benefit.