IRS letters explain why some 2020 Recovery Rebate Credits are different than expected

WASHINGTON − As people across the country file their 2020 tax returns, some are claiming the 2020 Recovery Rebate Credit (RRC). The IRS is mailing letters to some taxpayers who claimed the 2020 credit and may be getting a different amount than they expected.

It’s important to remember that the first and second Economic Impact Payments (EIP) were advance payments of the 2020 credit. Most eligible people already received the first and second payments and shouldn’t or don’t need to include this information on their 2020 tax return.

People who didn’t receive a first or second EIP or received less than the full amounts may be eligible for the 2020 RRC. They must file a 2020 tax return to claim the credit, even if they don’t usually file a tax return.

When the IRS processes a 2020 tax return claiming the credit, the IRS determines the eligibility and amount of the taxpayer’s credit based on the 2020 tax return information and the amounts of any EIP previously issued. If a taxpayer is eligible, it will be reduced by the amount of any EIPs already issued to them.

If there’s a mistake with the credit amount on Line 30 of the 1040 or 1040-SR, the IRS will calculate the correct amount, make the correction and continue processing the return. If a correction is needed, there may be a slight delay in processing the return and the IRS will send the taxpayer a letter or notice explaining any change.

Taxpayers who receive a notice saying the IRS changed the amount of their 2020 credit should read the notice. Then they should review their 2020 tax return, the requirements and the worksheet in the Form 1040 and Form 1040-SR instructions.

Here are some common reasons the IRS corrected the credit:

• The individual was claimed as a dependent on another person’s 2020 tax return.
• The individual did not provide a Social Security number valid for employment.
• The qualifying child was age 17 or older on Jan. 1, 2020.
• Math errors relating to calculating adjusted gross income and any EIPs already received.

IRS.gov has a special section – Correcting Recovery Rebate Credit issues after the 2020 tax return is filed – that provides additional information to explain what errors may have occurred. Taxpayers who disagree with the IRS calculation should review their letter as well as the questions and answers for what information they should have available when contacting the IRS.

The Internal Revenue Service urges people who have not yet filed their 2020 tax return to properly determine their eligibility for the 2020 before they file their 2020 tax returns. To calculate any credit due, start with the amount of any EIPs received. Use the RRC Worksheet or tax preparation software. Taxpayers who didn’t save or didn’t receive  an IRS letter or notice can securely access their individual tax information with an IRS online account.

Anyone with income of $72,000 or less can file their Federal tax return electronically for free through the IRS Free File Program. The fastest way to get a tax refund which will include your 2020 RRC is to file electronically and have it direct deposited  into their financial account. Bank accounts, many prepaid debit cards and several mobile apps can be used for direct deposit when a routing and account number are provided. If using a prepaid debit card, check with the financial institution to ensure the card can be used and to obtain the routing number and account number, which may be different from the card number.

The American Rescue Plan Act of 2021 excludes from income the first $10,200 in unemployment compensation received in 2020 per taxpayer on their 2020 tax return. The new provision applies to taxpayers with an AGI of less than $150,000. The IRS has recently released a new unemployment compensation exclusion worksheet and updated instructions on how to file 2020 tax returns that contain unemployment income.

The exclusion amount calculated on the worksheet flows back to Schedule 1 (Form 1040), line 8. UCE will print on the line next to line 8 identifying the amount as the unemployment compensation exclusion.

• Please note that this change can have significant impacts on your state return. We are in the process of working through the states and making any modifications needed to handle the new federal changes based on the state laws as we know them today.  We STRONGLY recommend you pay close attention to the state portion of the return.  If you find any issues or have any concerns please reach out to VITA/TCE support with a detailed explanation and an example return.
• Create a return tag if you choose to hold the state portion of the return to file once your state has made a decision on whether it will conform or not to the federal changes.

Returns filed prior to the release of the Federal Update in TaxSlayer Pro will automatically re-calculate to exclude the non-taxable portion of unemployment income. This is important – Please make sure you have a copy of the originally filed federal and state return before you open these returns. The original copy of the federal tax return and the state return will be needed to plug in the original column on the Amended federal and state forms once the IRS gives guidance on if or when an amended return needs to be filed. The original return can be accessed from Client List by using the Tools dropdown to access “Client Status”. Scroll down the Client Status page to locate the Federal transmission. The left print icon, when clicked, will open a new window that includes the original Federal transmission.

• We are aware the State PDF is not generating in Client Status and have this defect reported to development (Issue 5952).

Update 4/2/2021  6:00 PM EST:  We have deployed a correction to the required change for Unemployment exclusion.  You can now open returns with UCE and taxable SSA to show the correction.

We are reviewing a side effect of a change that was required to be made for Unemployment as part of the American Rescue Act.  These changes were deployed this morning at 5:00 am.  We recommend you create a return tag and hold any return until we can do some further review on the impact and implication of the change.  Note:  This only impacts returns with UCE and taxable SSA created and/or edited today after 5 am Eastern.

Update 3:15 PM:  The intermittent slowness has been resolved.  You may need to close your browser and open a new browser (not just the browser tab)

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Update 2:35 PM:  This seems to be intermittent.  We recommend you close your current browser (not just the tab) and open a fresh browser if you are still seeing the calculations stuck in a spin.

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We are currently experiencing issues with the calculations not updating properly.  We have opened an emergency ticket.  You can click Personal Information to break the “spin cycle” in order to exit the return or enter data directly without calculations.

IR-2021-71, March 31, 2021

WASHINGTON — To help taxpayers, the Internal Revenue Service announced today that it will take steps to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.

The legislation, signed on March 11, allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly and $10,200 for all other eligible taxpayers. The legislation excludes only 2020 unemployment benefits from taxes.

Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.

For those taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.

For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns.

There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.

For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may result in a larger refund. However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income.

These taxpayers may want to review their state tax returns as well.

According to the Bureau of Labor Statistics, over 23 million U.S. workers nationwide filed for unemployment last year. For the first time, some self-employed workers qualified for unemployed benefits as well. The IRS is working to determine how many workers affected by the tax change already have filed their tax returns.

The new IRS guidance also includes details for those eligible taxpayers who have not yet filed.

The IRS has worked with the tax return preparation software industry to reflect these updates so people who choose to file electronically simply need to respond to the related questions when electronically preparing their tax returns. See New Exclusion of up to $10,200 of Unemployment Compensation for information and examples. For others, instructions and an updated worksheet about the exclusion were available in March and posted to IRS.gov/form1040. These instructions can assist taxpayers who have not yet filed to prepare returns correctly.

Update 3/31/2021:  The IRS has disabled the business rule that generates this reject.  You can now resubmit any returns rejected for this business rule

Even though the filing season has been extended to May 17th, the following IRS business rule is still active.

Scenario:  My return has a balance due and the taxpayer wants to have it direct debited after 4/15/2021

Result:  The return will get rejected for FPYMT-072-01 (If the return is received on or before the due date of the return, then the “RequestdPaymentDt” in the IRS Payment record must be on the due date or before the due date.

The IRS has disabled this business rule.  If you have any returns rejected for this reason, you can transmit them.

8:25am ET: The issue has been resolved and access to state returns has been restored.

8:01am ET: We have received reports of users getting errors when going to the state portion of the return.  We have opened a critical ticket and are currently reviewing this error.