We received a letter stating the changes made to our 2020 tax return due to the first $10k of unemployment not being taxable on or about August 9, 2021.
It says our account balance before the change was $2028 and our account balance after the change is $0. The problem is, we paid that $2028 to the IRS, so technically we overpaid by $2028 for the 2020 tax year. I understand they are sending refunds, but we have an installment agreement for previous years.
My question is, will they apply this adjustment to the previous years, or will they send a refund?
According to the following IRS website, the refund can be used to offset any federal tax debts.
Q4. If the exclusion adjustment results in a refund, will the IRS use the refund to pay (offset) any unpaid debts I may have? (added April 29, 2021)
A4. Yes. Unpaid debts include past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or certain federal nontax debts, such as student loans. If the refund is offset to pay unpaid debts, a notice will be sent to inform you of the offset.
I hope you are doing well today. You stated that you received a letter from the IRS explaining they made changes to your 2020 Federal Return. You had unemployment income on your 2020 return and they adjusted it to exclude $10,200 of the unemployment income from your total taxable income. You owed $2,028 prior to the unemployment income exclusion change. The change caused your balance to be $0. You already paid your 2020 Return balance due of $2,028 and, due to the unemployment income exclusion payments, now should be owed a refund of $2,028. You owe income taxes for past years other than 2020, which are currently in an installment agreement with the IRS. You wanted to know if the IRS will issue you a refund for the $2,028 or if they will keep the refund amount and apply it to the past due taxes owed.
To answer your question, the IRS will keep the $2,028 refund amount and apply it to the oldest tax period for which you owe. Unfortunately, they will keep the refund amount even if your are in an installment agreement. According to the IRS, "(o)ne of the conditions of your installment agreement is that the IRS will automatically apply any refund (or overpayment) due to you against taxes you owe. Because your refund isn't applied toward your regular monthly payment, continue making your installment agreement payments as scheduled.
If your refund exceeds your total balance due on all outstanding tax liabilities including accruals, you'll receive a refund of the excess unless you owe certain other past-due amounts, such as state income tax, child support, a student loan, or other federal nontax obligations which are offset against any refund." This is referred to as a refund offset. Please see the link below for more the above quote and contact information for any refund inquiries.
I hope this answers your questions. Thanks for using Turbotax Live!
Taylor, Tax Attorney, 11 Years
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