IRS to send 1.5 million additional tax refunds over unemployment benefits

The Internal Revenue Service (IRS) will issue an additional 1.5 million tax refunds — averaging more than $1,600 — this week to filers who paid too much in taxes for their 2020 unemployment benefits.

The refunds by direct deposit will start on July 28, and those by paper check will begin July 30.

This is the fourth round of refunds related to the recently added tax exemption for the first $10,200 of unemployment benefits.

"The IRS effort focused on minimizing burden on taxpayers so that most people won’t have to take any additional action to receive the refund," the agency said in a statement on Wednesday. "The IRS review means most taxpayers affected by this change will not have to file an amended return because IRS employees have reviewed and adjusted their tax returns for them."

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Under the $1.9 trillion American Rescue Plan, the first $10,200 in unemployment benefits aren't taxed for eligible filers. Because the legislation was signed into law halfway through the tax season, some taxpayers had already filed their federal returns without taking advantage of the new tax break.

The agency identified 13 million taxpayers who may be eligible for an adjustment as of June. For this round of refunds, the agency reviewed 1.7 million returns and approximately 1.5 million were eligible for an average refund of $1,686. The agency has so far issued more than 8.7 million unemployment benefits refunds worth over $10 billion.

The review and the processing of the additional refunds will continue throughout the summer.

Filers whose tax returns have been processed will receive two tax refunds: The first reflects how they filed, and the second refund will reflect any tax break they get on their unemployment benefits. The IRS will issue refunds by direct deposit for taxpayers with valid banking information on their 2020 return. If that information is not available, a paper check will be sent instead.

The refunds will be subject to normal offset rules, including past-due federal tax, state income tax, and state unemployment compensation debts, among others. If the refund is used to pay unpaid debt, the IRS will send a separate notice.

Both regular unemployment benefits and the jobless benefits provided by the stimulus legislation are subject to income tax. But the newly added tax exemption is for the first $10,200 of unemployment benefits; any benefits above that threshold are taxable. The break applies to the 2020 tax year and for households making up to $150,000.

Taxpayers who become eligible for the Earned Income Tax Credit (EITC) after the unemployment benefits exclusion is calculated may have to file an amended return to claim new benefits, the IRS said.

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova