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TaxWatch: Here’s a ray of hope for people worried they missed a valuable tax break on unemployment benefits by filing too soon

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Some people who already filed their taxes might have a headache-free way out of a jam created by the newly-enacted $1.9 trillion American Rescue Plan.

Though jobless benefits count as taxable income, one part of the sprawling law says the first $10,200 of those benefits are exempt from federal income taxes for households making under $150,000.

That’s a valuable tax break for people rebounding from 2020’s brutal job market. It could clip approximately $1,000 to $2,000 off a household’s tax bill, according to some experts.

But by the time the law took effect, the Internal Revenue Service had already received at least 55 million individual tax returns. It’s a good bet some of the people in that stack of 55 million returns were reporting jobless benefits and could have benefited from the tax break.

The IRS may be able to adjust these returns with no extra paperwork or amended returns from the people who have already filed, IRS Commissioner Charles Rettig told lawmakers Thursday.

“We’re sensitive to the situation that people are in,” he said. “We believe that we will be able to handle this on our own. We believe that we will be able to automatically issue refunds associated with the $10,200.”

To be clear, it’s not a done deal. Rettig said he hopes the IRS can formally announce “in the near future” that this is the step it is taking for the tax returns snagged in this scenario.

The IRS has previously advised anyone who reported unemployment benefits and already filed to not file an amended return until it figures out the next steps. Rettig reiterated the point on Thursday. “The people who filed should absolutely not file an amended return,” he said.

A handful of senators and Hours representatives have urged IRS officials to try making the adjustments on their end instead of tasking taxpayers with submitting an amended return.

On Wednesday, the IRS announced it was pushing the income-tax filing and payment deadline to May 17 from April 15.

The tax collection agency pushed back the deadline as the clamor for an extension intensified. More than 100 House members called for a deadline extension earlier in the week.

One reason for more time, they said, was addressing the predicament of people who already filed their income taxes.

Rettig’s remarks were “fantastic news,” according to Rep. Cindy Axne, a Democrat from Iowa who sponsored the $10,200 exemption in the House and then was part of the group asking the IRS to make automatic adjustments.

The fix on the IRS side would avoid “putting more on the plate of stressed and overwhelmed American families,” Axne said after the hearing. “I would urge everyone who is eligible for these benefits to hold off on filing an amended return, and look for final word from the IRS on getting these benefits.”

2020 also brought on a rash of unemployment insurance fraud, where crooks stole identities and then attempted to receive jobless benefits in another person’s name.

At least $36 billion in money intended for federal jobless benefits under last March’s $2.2 trillion CARES act could have been improperly paid, with much of that going to fraudsters, according to the Department of Labor’s Inspector General.

The IRS does not want to tax people on jobless benefits they did not seek, Rettig said Thursday. Anyone who spotting a discrepancy between what they claimed and what the tax paperwork from their state says they claimed should tell their state labor department, he said.

“The people who have had their identities taken in this should only file and report for income they have actually received. Do not report any other numbers at all,” Rettig noted.

“You all see the same numbers we do. It’s staggering, and it’s really been the vulnerable populations once again, time after time.”

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