The IRS has planned to issue over 2.8 million refunds to taxpayers who paid taxes on unemployment compensation, that the American Rescue Plan Act (ARP) ( P.L. 117-2) has recently excluded as taxable income. The ARP excluded up to $10,200 in unemployment compensation per taxpayer paid in 2020. Further, the IRS has endeavored to correct unemployment compensation overpayments; a move that is expected to help affected taxpayers avoid filing an amended tax return. Up until recently, the IRS had identified 13 million taxpayers that may be eligible for the adjustment. Some are expected to receive refunds, which will be issued periodically, and some will have the overpayment applied to taxes due or other debts.
In addition, the IRS also began its programming review of tax returns that were filed prior to the enactment of ARP. This was largely done to identify the excludible unemployment compensation. Similarly, the IRS also made corrections for social security benefits that were affected by the exclusion, including the Earned Income Tax Credit (EITC), premium tax credit and recovery rebate credit. Importantly, taxpayers who have qualifying children and who become eligible for the EITC after exclusion may have to file an amended return to claim new benefits. The IRS would adjust tax returns for those who are single with no children and who become eligible for the EITC.
Finally, the IRS announced plans to issue the next set of refunds in mid-June. The review of returns and processing corrections has been scheduled to continue through the summer. Taxpayers are expected to receive letters from the IRS, generally within 30 days of the adjustment, informing them of the type and amount of the adjustment.