IRS Unemployment Refunds
The IRS has indicated that it has begun to issue refunds to taxpayers who paid 2020 income taxes on unemployment compensation before the retroactive change that excluded some or all of such compensation for certain taxpayers was enacted as part of the American Rescue Plan. These refunds were discussed in our April 1, 2021 post.
The IRS is starting with refunds for single taxpayers and will move to refunds for other taxpayers in later phases.
Refunds will be directly deposited into the bank accounts of taxpayers, if they provided bank information on their 2020 income tax returns. Otherwise, refunds will be sent by paper check. Taxpayers with certain outstanding debts may have their refunds applied to those debts, and the IRS has indicated that it will send notices to taxpayers affected by such an offset of their refunds.
For affected taxpayers, the exclusion of unemployment compensation will result in lower adjusted gross income than was reported on originally-filed returns, and this lower income may make affected taxpayers eligible for some credits or deductions that were not claimed on those originally-filed returns.
The IRS has indicated that it will correct the earned income tax credit without qualifying children and the recovery rebate credit for taxpayers who are now eligible for higher credits due to the reduction of their adjusted gross income. However, the IRS will not make corrections for other deductions and credits. Therefore, once a taxpayer receives a refund from the IRS, an amended return may still need to be filed to claim higher credits or deductions for which they are now eligible, using the lower adjusted gross income that results from the exclusion of unemployment compensation.