IRS issues 12 million tax refunds after correcting 2020 returns

The Internal Revenue Service issued 12 million tax refunds to Americans who paid too much in taxes on unemployment benefits they received in the first year of the pandemic.

The agency corrected 14 million 2020 tax returns related to unemployment compensation, resulting in $14.8 billion in refunds that averaged $1,232 each. The IRS started correcting the returns in May 2021.

The IRS undertook the tax probe because the American Rescue Plan, which excluded up to $10,200 in unemployment aid from being taxed in 2020, went into effect after some taxpayers had already filed their tax returns for the 2020 tax year.

“Some taxpayers received refunds, while others had the overpayment applied to taxes due or other debts,” the IRS said in a statement. “In some cases, the exclusion only resulted in a reduction in their adjusted gross income.”

Those eligible for the unemployment exclusions for the 2020 tax year included individuals and married couples whose modified gross income was below $150,000. Overall, roughly 40 million Americans received unemployment benefits in 2020, the Century Foundation previously estimated.

Other corrections the agency made included adjustments to the Earned Income Tax Credit, Recovery Rebate Credit, Additional Child Tax Credit, Premium Tax Credit and Advanced Tax Credit.

If a taxpayer is eligible for the unemployment compensation exclusion and their account was not corrected by the IRS, they should file an amended 2020 tax return to claim any refunds or credits due, the IRS added.

“This is a good example of the U.S. underfunding the IRS and then the U.S. needing a safety net, not having anything set up, and doing whatever could happen ASAP,” Rus Garofalo, president and founder of Brass Taxes, told Yahoo Finance, noting that the agency is still dealing with massive paper backlogs on other returns. “If you have information about a refund being 'in process' or 'delayed,' it is going to be very hard to talk to someone at the IRS, but in general, they do get to everything and get it corrected in good time.”

Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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