The IRS plans to automatically process refunds for taxpayers who had unemployment income in 2020 and filed their tax returns before legislation passed that made those benefits tax-free.
The American Rescue Plan, which was signed into law by President Joe Biden on March 11, made the first $10,200 of unemployment income tax-free for people with adjusted gross income of less than $150,000 in 2020. (The break is $20,400 for two workers in a married couple filing taxes jointly.)
But by the time the law passed, in the middle of tax season, some people who received unemployment income in 2020 had already filed and paid taxes on those benefits.
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The IRS is working on a fix that means most people in that situation will not have to take any extra steps, such as sending in an amended tax return, to recoup the taxes they paid but don't owe per the new rule.
"Do not file an amended return at this time," IRS Commissioner Charles Rettig said during a Thursday hearing with the House Ways and Means Committee.
"We believe that we will be able to handle this on our own," he said. "We believe that we will be able to automatically issue refunds associated with the $10,200."
Rettig said that the IRS would release more details in the coming days.
New tax filing instructions
People who had unemployment income in 2020 and have not yet filed their tax return may need to wait to ensure that they submit all information to the IRS correctly.
The agency on Friday released new instructions, including a worksheet for paper filers, and said it would work with online tax programs to update current software.
Taxpayers have additional time to sort out and file their taxes this year. The IRS recently pushed the tax filing deadline for individual taxpayers to May 17 from April 15.
That extension only applies to individual returns, however, and not to estimated tax payments or corporate taxes, which are still due April 15.
Rettig said that the deadline was pushed only for individuals to help the most vulnerable taxpayers during a complicated tax season. He also said that, going forward, extensions of the tax-filing season cannot become a pattern.
The IRS had received more than 66 million tax returns as of March 13, according to the agency, a 13.3% drop from the same time last year. So far, 42.5 million refunds have been sent to taxpayers, about a 28% decline from 2020.
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