IRS Begins Correcting Taxes to Account for Unemployment Income Exclusion
The American Rescue Plan became a law in March of 2021. One of its provisions was the exclusion of up to $10,200 of unemployment compensation from taxable income for 2020. This is applicable for all taxpayers who made under $150,000 over the course of the tax year.
The Rescue Plan went into effect after many Americans filed taxes with their full unemployment compensation included in their taxable income. Now the IRS faces the difficult task of correcting those taxes to provide refunds to those individuals.
It is estimated that over 10 million taxpayers did their taxes before the act went into effect. Those people may be getting bigger refunds, a reduction in the amount owed or they may end up with no change.
The IRS has started the corrections process and is working with a phased approach. In the first phase, they will be correcting the simplest returns. This includes returns where taxpayers did not claim dependents or refundable credits.
For the next phase, they will be tackling returns that are more complex.
It is estimated that the corrections will be ongoing throughout the summer.
Refunds will be sent via direct deposit to taxpayers who provided bank account information on their taxes. If no account information is available, checks will be sent through the mail.
Refunds may be applied to pay unpaid debts such as past due taxes, spousal support, unemployment compensation debts, child support and certain federal nontax debts such as student loans.
The IRS will be sending taxpayers a notice explaining any corrections that have been made. The notice should arrive within 30 days of the correction taking place. Taxpayers should review their taxes to ensure their corrections are accurate and they should hold on to the notices they receive.
Corrections to Earned Income Tax Credit and the Recovery Rebate Credit will be included in the process. However, if taxpayers become eligible for income-based credits due to the changes in gross income, they should file an amended return.
The Rescue Act also excuses taxpayers from repaying excessive advanced payments of the Premium Tax Credit (excess APTC). Taxpayers who made an excess APTC payment on their 2020 taxes will be refunded and the amount will be included in any adjustments made for unemployment compensation. The excess APTC payment will also be refunded for those who did not collect unemployment.
