The IRS announced this week that the agency is beginning to issue refund checks to taxpayers who filed tax returns treating unemployment compensation as taxable in cases that Congress later made nontaxable in the American Rescue Plan of 2021 (ARPA).[1]

The news release explains the nature of the law change as follows:

Unemployment compensation is taxable income. The American Rescue Plan excludes $10,200 in 2020 unemployment compensation from income used to calculate the amount of taxes owed. The $10,200 per person exclusion applies to taxpayers, single or married filing jointly, with modified adjusted gross income of less than $150,000. The $10,200 is the amount of income exclusion, not the amount of the refund. Refund amounts will vary and not all adjustments will result in a refund.

The release begins by noting that the IRS has identified more than 10 million returns that may need to have refunds issued:

The IRS identified over 10 million taxpayers who filed their tax returns prior to the American Rescue Plan of 2021 becoming law in March and is reviewing those tax returns to determine the correct taxable amount of unemployment compensation and tax. This could result in a refund, a reduced balance due or no change to tax (no refund due nor amount owed).

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.[2]

The release outlines the first phase of the program:

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 IRS will issue refunds resulting from this effort by direct deposit for taxpayers who provided bank account information on their 2020 tax return. If valid bank account information is not available, the refund will be mailed as a paper check to the address of record. The IRS will continue to send refunds until all identified tax returns have been reviewed and adjusted.

These refunds are 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 will send taxpayers a notice explaining the corrections, which they should expect within thirty days of when the correction is made. Taxpayers should keep any notices they receive for their records. Taxpayers should review their return after receiving their IRS notice(s).[3]

The release notes that while the IRS is able to properly adjust the Earned Income Tax Credit for some taxpayers impacted by this change, others will still need to file an amended return to claim the full refund to which they are entitled:

Correction to any Earned Income Tax Credit (EITC) without qualifying children and the Recovery Rebate Credit are being made automatically as part of this process. However, some taxpayers may be eligible for certain income-based tax credits not claimed on their original return, such as the EITC for their qualifying children. If so, they should file an amended tax return if the revised adjusted gross income amount makes them eligible for additional benefits.[4]

The release also notes “[m]ore complex corrections will begin upon the completion of the first phase and involves couples filing as married filing jointly.”[5]

Taxpayers who have not yet filed a return and received unemployment benefits are directed to follow the revised instructions for Form 1040 and Form 1040-SR.[6]

The release also announces at the end that the IRS will be issuing refunds for those that paid back a portion of their Advance Premium Tax Credit. ARPA removed the requirement for taxpayers to repay any excess advance payments, creating another group of taxpayers who had filed their returns and are now due a refund:

The legislation also suspends the requirement to repay excess advance payments of the Premium Tax Credit (excess APTC). If a taxpayer paid an excess APTC repayment amount when they filed their 2020 return, the IRS is also refunding this amount automatically. If the IRS corrects the taxpayer's account to reflect the unemployment income exclusion, the excess APTC amount that the taxpayer paid will be included in that adjustment. The IRS is also adjusting accounts for those who repaid excess APTC but did not report unemployment compensation on their 2020 tax return.[7]

[1] “IRS begins correcting tax returns for unemployment compensation income exclusion; periodic payments to be made May through summer,” News Release IR-2021-111, May 14, 2021, https://www.irs.gov/newsroom/irs-begins-correcting-tax-returns-for-unemployment-compensation-income-exclusion-periodic-payments-to-be-made-may-through-summer (retrieved May 16, 2021)

[2] “IRS begins correcting tax returns for unemployment compensation income exclusion; periodic payments to be made May through summer,” News Release IR-2021-111, May 14, 2021

[3] “IRS begins correcting tax returns for unemployment compensation income exclusion; periodic payments to be made May through summer,” News Release IR-2021-111, May 14, 2021

[4] “IRS begins correcting tax returns for unemployment compensation income exclusion; periodic payments to be made May through summer,” News Release IR-2021-111, May 14, 2021

[5] “IRS begins correcting tax returns for unemployment compensation income exclusion; periodic payments to be made May through summer,” News Release IR-2021-111, May 14, 2021

[6] “IRS begins correcting tax returns for unemployment compensation income exclusion; periodic payments to be made May through summer,” News Release IR-2021-111, May 14, 2021

[7] “IRS begins correcting tax returns for unemployment compensation income exclusion; periodic payments to be made May through summer,” News Release IR-2021-111, May 14, 2021