Did You File Before Congress Passed the Unemployment Tax Exclusion? Here is How the IRS is Handling the Situation

Article Highlights:

American Rescue Plan Act
Unemployment Income Exclusion
Early Filers
IRS Automatic Adjustment
Refund Schedule
Method of Payment
Refund Offsets
Potential Need for Amended Return
Adjustment Notice

Normally, unemployment insurance benefits are fully taxable for federal purposes. However, earlier this year, about the middle of the tax filing season, Congress, as part of the American Rescue Plan Act, decided that each individual who received unemployment benefits could exclude the first $10,200 of those benefits from taxation if their modified AGI was less than $150,000.

This created a problem, since the exclusion was announced after millions of taxpayers had already filed their tax returns. The IRS, not wanting to deal with amended returns from all those early filers, announced they would automatically make the adjustment and send out the appropriate refunds, The IRS also cautioned taxpayers not to file amended returns since the Service would be making the adjustment.

If you are a 2020 unemployment benefits recipient who filed early and have been waiting for a refund, the IRS has announced it will begin issuing refunds on May 15, 2021. The IRS plans to adjust the simplest returns first, which are those filed by unmarried taxpayers, followed by the returns of married taxpayers. The IRS estimates it will take through the end of summer to review and correct all of the returns.

The IRS will issue refunds by direct deposit where a taxpayer included bank account information on their 2020 tax return; otherwise, the refund will be by a check mailed to the taxpayer’s address of record.

The IRS will send taxpayers a notice explaining the corrections, which they should expect within thirty days of when the correction is made. You are strongly urged to retain the notice and forward it to this office, since the IRS concedes they may not pick up all the adjustments made possible by the reduced income as discussed below.

Refunds will be subject to normal offset rules, such as past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support or certain federal nontax debts (i.e., student loans). The IRS will send a separate notice to the taxpayer if the refund is offset to pay unpaid debts.

The IRS has indicated the adjustments they will make include the Earned Income Tax Credit (EITC) for taxpayers without qualifying children and the Recovery Rebate Credit. However, some taxpayers may be eligible for certain income-based tax credits not claimed on their origi