IRS reducing, correcting Recovery Rebate Credit claims

The Internal Revenue Service is mailing letters to taxpayers explaining why they may not be getting as much of a Recovery Rebate Credit as they were expecting on their taxes.

The amount of the credit claimed on their 2020 tax return may be reduced if they were claimed as a dependent on someone else’s 2020 tax return, they didn’t provide a Social Security number that’s valid for employment, a child claimed on their return was 17 or older as of Jan. 1, 2020, or they made mathematical errors in calculating their adjusted gross income and any Economic Impact Payments they’ve already received.

The Recovery Rebate Credit is supposed to allow taxpayers to get either the first or second rounds of stimulus payments they didn’t receive last year or earlier this year under either the CARES Act or the Consolidated Appropriations Act, or if they didn’t receive the full amount to which they were entitled. It’s supposed to provide a stopgap for the IRS’s incomplete recordkeeping, as the agency might not know if someone lost a job or had another child last year, and taxpayers are able to claim the credit on the returns they file this year. However, some taxpayers may have overestimated how much they thought they would receive or didn’t take into account the factors that the IRS is now citing for reducing the credits they are claiming.

“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,” said the IRS in a news release Monday. “If a taxpayer is eligible, it will be reduced by the amount of any EIPs already issued to them.”

The IRS considers the first and second Economic Impact Payments to be advance payments of the 2020 Recovery Rebate Credit, and noted that most eligible taxpayers have already received the first and second payments. Therefore they shouldn’t need to include the information on their 2020 tax return. But taxpayers who didn’t receive a first or second EIP or received less than the full amounts may be eligible for the Recovery Rebate Credit. To get it, they have to file a 2020 tax return to claim the credit, even if they don’t usually file a tax return.

If there’s an error with the credit amount claimed on Line 30 of the 1040 or 1040-SR, the IRS said it 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,” the IRS added.

Taxpayers who get a notice saying the IRS changed the amount of their 2020 credit should read the notice, review their 2020 tax return, the requirements and the worksheet in the instructions for the Form 1040 and Form 1040-SR. The IRS has added a set of questions and answers to its website, Correcting Recovery Rebate Credit issues after the 2020 tax return is filed, with more information explaining which errors may have occurred. Taxpayers and tax practitioners who disagree with the IRS calculation can review their letter as well as the questions and answers for what information they should have available when contacting the IRS.

The IRS is encouraging people who have not yet filed their 2020 tax return to properly determine their eligibility for the Recovery Rebate Credit before they file their 2020 tax returns. To figure any credit due, they can start with the amount of any EIPs they have received, use the RRC Worksheet or tax preparation software. Taxpayers who didn’t save or didn’t receive an IRS letter or notice can find it online by securely accessing their individual tax information through an IRS online account.

For more information, visit the Recovery Rebate Credit page and the frequently asked questions page on IRS.gov and check out the following topics: