The IRS says that it has finished its review and issued automatic corrections for taxpayers who were improperly taxed on unemployment compensation for the 2020 tax year.
Unemployment compensation is typically taxable. However, as part of Covid relief, certain unemployment compensation was excluded from taxation for the 2020 tax year. To qualify, your modified adjusted gross income must have been less than $150,000—qualifying taxpayers could exclude up to $10,200 of unemployment compensation (per spouse) for the 2020 tax year.
The law wasn’t passed until March of 2021, months after many taxpayers had filed their 2020 tax returns. To stop a potential torrent of amended returns at a time when the IRS was already backlogged, the IRS advised that it would automatically correct the returns. The agency says that it corrected approximately 14 million returns.
As a result of the fix, some taxpayers received additional refunds or had their overpayment applied to taxes due. It’s also possible that there was a change to your adjusted gross income that impacted other credits. All of those calculations should have been adjusted automatically for you. If you are one of those taxpayers, you should have received a letter from the IRS advising you about the corrections. Keep that letter with your records.
If you were eligible for the exclusion—and did not claim it—and the IRS did not automatically correct your return, you may need to file an amended tax return (Form 1040X). If you were eligible for the exclusion and did claim it, you don’t have to do anything further.