IRS to send refunds to those who got unemployment payments and overpaid their taxes

The Internal Revenue Service will begin issuing refunds this week to those who paid taxes on 2020 unemployment compensation that the American Rescue Plan later said they did not owe.

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Some who received unemployment benefits during 2020 filed their taxes before the American Rescue Plan Act was passed in March, which meant they could have paid income tax on a portion of their unemployment benefits that the plan exempted once it was passed.

According to the IRS, more than 10 million taxpayers filed their tax returns prior to the American Rescue Plan of 2021 becoming law in March. The IRS is reviewing those returns to determine the correct taxable amount of unemployment compensation and the tax owed.

This could mean that those returns are revised so that the taxpayer is due a refund, that they owe less than they did, or that they owe nothing.

Unemployment compensation is considered taxable income, however the American Rescue Plan excluded $10,200 in 2020 unemployment compensation from income used to calculate how much tax a person owes.

The IRS will begin issuing refunds this week.

According to the IRS, “These corrections are being made automatically in a phased approach, easing the burden on taxpayers. The first phase is underway and includes the simplest returns. The next phase will include the more complex tax returns which the IRS anticipates will take through the end of summer to review and correct.

“The first phase of adjustments is being made for single taxpayers who had the simplest tax returns, such as those filed by taxpayers who did not claim children or any refundable tax credits.”

The refunds will come by direct deposit, the agency says, unless they do not have a bank account number on file, then paper checks will be sent out. The IRS will send taxpayers a notice explaining the corrections, which they should expect within thirty days of when the correction is made, the agency website stated.