The Internal Revenue Service is reviewing the tax returns of 10 million people and will begin issuing additional refunds this week to those who paid too much in taxes for their 2020 unemployment benefits. The agency said in a statement on Friday.
“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).”
Under the $1.9 trillion American Rescue Plan, the first $10,200 in unemployment benefits aren’t taxed for eligible filers. Because the legislation was signed into law halfway through the tax season, it was unclear what eligible taxpayers should do if they filed their federal return already. The IRS previously said that jobless workers who already filed their taxes won’t need to amend their returns.
Filers whose tax returns have been processed will receive two tax refunds: the first reflects how they filed and the second refund will reflect any tax break they get on their unemployment benefits, Commissioner Charles Rettig said in March.
The IRS will issue the refunds by direct deposit for taxpayers with valid banking information on their 2020 return. They agency will send a paper check if that information is not available.
The refunds will be subject to normal offset rules including past-due federal tax, state income tax, state unemployment compensation debts among others. If the refund is used to pay unpaid debt, the IRS will send a separate notice.
The first phase of the adjustment is made for single filers with simpler tax returns which, for example, didn’t claim dependents or any refundable tax credits. The next phase will review more complex returns which may take “through the end of summer” to correct, the agency said.
Both regular unemployment benefits and the jobless benefits provided by the stimulus legislation are subject to income tax. But the newly added tax exemption is for the first $10,200 of unemployment benefits; any benefits above that threshold are taxable. The break applies to the 2020 tax year and for households making up to $150,000.
The break would increase a taxpayer’s refund by about $1,000 or reduce their tax liability by the same amount, according to previous estimates from Andrew Stettner, an unemployment insurance expert and senior fellow at the Century Foundation.
Aside from the complications from the pandemic, the backlog is also the result of a chronically understaffed agency.
Since 2010, the IRS has lost 21,000 employees and its budget has declined around 20% when taking inflation into account. It also had a hiring freeze in place from 2011 to 2018, making it harder to employ enough people to fill the jobs lost. As state Samantha Jacoby, senior tax legal analyst at the Center on Budget and Policy Priorities,
“The pandemic, as well as the longstanding budget cuts, are the two big reasons for a larger-than-normal backlog. The IRS has been the subject of funding cuts for at least a decade, which likely made them less able to handle [the move to remote work] that they didn’t anticipate.”
In the meantime, getting in touch with the IRS has been onerous. You have to call very early in the morning and you’re still going to be on hold for hours.
Some of the backlogged returns were frozen by the IRS fraud filters, the National Taxpayer Advocate report found. For 1 in 4 returns flagged for income verification, it took refunds longer than 56 days to be sent. For nearly 1 in 5 flagged for identity verification, it took refunds over four months to be sent.
A Treasury watchdog warned that taxpayers may face delays in getting their refunds this season because the IRS is still dealing with last year’s backlog and faces difficulties hiring enough workers to process old and incoming returns.
That warning appears prescient.