The IRS says it will begin issuing refunds this week to people who paid taxes on their 2020 unemployment benefits before a new federal law was enacted in March excluding this income from federal taxes.
The IRS has identified over 10 million taxpayers who filed 2020 tax returns prior to the American Rescue Plan of 2021 becoming law in March. That law excluded $10,200 in 2020 unemployment compensation from taxpayer income that is used to calculate the amount of taxes owed.
The change also affected some self-employed taxpayers who for the first time qualified for unemployed benefits in 2020, including freelancers, gig workers and independent contractors who typically are ineligible.
The IRS is reviewing all affected tax returns to determine the correct taxable amount of unemployment compensation and tax, which could result in a refund to the taxpayer, a reduced balance due, or no change.
Tax returns are being made automatically corrected in a phased approach, starting with the simplest returns that did not claim children or any refundable tax credits, the IRS said.
The IRS said Friday that starting this week, tax refunds for affected taxpayers will be issued by direct deposit for those who provided bank account info on their 2020 tax returns. Paper checks will be mailed to those who did not include bank account information.
The next phase of the process will include the more complex tax returns, such as couples who are married filing jointly. The IRS anticipates will take through the end of summer to review and correct.
All 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). Taxpayers will receive a separate notice if a refund is used to offset debts.
For additional information see the following IRS document: Tax Treatment of Unemployment Compensation.