IRS completes issuing refunds for taxpayers who overpaid tax on 2020 unemployment compensation

The Internal Revenue Service recently completed the final corrections of the tax year 2020 accounts for taxpayers who overpaid their taxes on unemployment compensation they received in 2020. The agency corrected approximately 14 million returns. These corrections resulted in nearly 12 million refunds totaling $14.8 billion, with an average refund of $1,232.

Background 

The American Rescue Plan Act of 2021 (ARPA) became law in March 2021. ARPA excluded up to $10,200 in 2020 unemployment compensation from taxable income calculations, up to $10,200 for each spouse if married filing joint. The exclusion applied to individuals and married couples whose modified adjusted gross income was less than $150,000. 

To ease the burden on taxpayers, the IRS announced that it would review Forms 1040 and 1040-SR filed prior to the ARPA’s enactment. This review would allow the IRS to identify taxpayers who had already reported unemployment compensation as income and were eligible for the correction. The IRS calculated the correct taxable amount of unemployment compensation and tax, and started issuing refunds in May of 2021. 

Changes made in taxpayers’ accounts 

Some taxpayers received refunds, while others had the overpayment applied to taxes due or other debts. In some cases, the exclusion only resulted in a reduction in their adjusted gross income. The IRS mailed these taxpayers a letter informing them of the corrections.  

The IRS suggested that taxpayers keep that letter with their tax records. 

In addition to adjustments made for unemployment compensation, the IRS also made adjustments that included corrections to the following credits (topics with an asterisk * may require a subscription to CCH AnswerConnect, Wolters Kluwer's industry-leading tax research solution, to read the full article):  

• Earned Income Tax Credit*  
• Recovery Rebate Credit 
• Additional Child Tax Credit 
• American Opportunity Tax Credit* 
• Premium Tax Credit 
• Advance Premium Tax Credit 

Many of these credits are discussed in my August article, tax pros can help extended filer clients by reviewing available tax benefits. 

Taxpayers whose accounts weren’t adjusted – what they should do 

If a taxpayer is eligible for the unemployment compensation exclusion and their account was not corrected by the IRS, they may need to file an amended 2020 tax return to claim the exclusion and any applicable non-refundable or refundable credits impacted by the exclusion. 

Note that taxpayers should not file an amended return if they previously filed one claiming the exclusion.  

For more information about this, including eligibility requirements, the IRS advises taxpayers to go to 2020 Unemployment Compensation Exclusion FAQs on IRS.gov. 

Taxpayers who need to amend tax year 2020 Forms 1040 and 1040-SR should file Form 1040-X, Amended U.S. Individual Income Tax Return. 

Tax pro tip: access taxpayer tax account manuscripts to review IRS changes 

Tax professionals who have access to their clients’ accounts or the taxpayers themselves can view their 2020 tax records in their Online Account or request that a 2020 tax account manuscript be mailed to them.