If my taxes are audited, will I receive the 3rd stimulus?

March, 19 2021 by Jean Lee Scherkey, EA

If my 2020 taxes are being audited, will I still receive the 3rd stimulus?

-Marquitta



Dear Marquitta,

During this pandemic, most of us miss seeing family and we are counting the days to when we can be reunited and resume get-togethers. However, unless our dear Uncle Sam comes bearing refunds or a stimulus check, we would rather have our hearts grow fonder by Uncle Sam’s absence. In any situation, being audited by the IRS or a state tax agency is rarely a pleasant experience and akin to being left on a running carnival tilt-a-whirl while the ride attendant takes a two-hour lunch break.

First, let’s go through some basics about the third round of Economic Impact Payments (EIP). The Economic Impact Payments are an advance payment of the Recovery Rebate Credit. To determine who qualifies for the third EIP, the IRS will review the taxpayer’s 2020 income tax return if it has been filed and, if it has not been filed, the IRS will review their 2019 return. To be eligible, the recipient’s adjusted gross income (total reported income minus certain specific adjustments) must be no more than $75,000 if filing as “Single,” $112,500 if filing as “Head of Household,” and $150,000 if filing “Married Filing Joint” or “Qualifying Widow(er).” Once a taxpayer’s adjusted gross income reaches $80,000 if filing as “Single,” $120,000 if filing as “Head of Household,” and $160,000 if filing as “Married Filing Joint” or “Qualified Widow(er),” EIP distributions are phased-out entirely, and the taxpayer will not receive a payment. In addition to the income level requirement, the EIP recipient must have a valid Social Security number and not be claimed as a dependent on someone else’s income tax return. While the third EIP payment is being made based on your 2020 federal return information, if you do not receive the advance payment, you may still claim it as a Recovery Rebate Credit when you file your 2021 federal return in 2022. This is because the third EIP payment is an advance on a 2021 Recovery Rebate Credit.

Unlike the first and second rounds of Economic Impact Payments paid out in 2020, the third round is not protected from the reach of creditors. Once the payment is deposited into the recipient’s bank account, creditors - such as the IRS and state tax agencies - may levy the Economic Impact Payment funds. Whether the lack of protection from debt collectors was an unintended oversight remains to be seen. Hopefully, Congress will approve legislation that will protect the third round of EIP distributions from creditors like the first two rounds were protected.

Keep in mind that the Recovery Rebate Credit claimed on your 2020 tax return can be used to pay any outstanding federal and state income taxes. This means that if your 2020 return shows a Recovery Rebate Credit and the IRS determines you owe additional tax, the IRS may take part or all of the Recovery Rebate Credit amount to satisfy the balance due. The IRS has not issued guidance on whether an EIP distribution will be placed on hold if a taxpayer’s 2020 return is audited to question dependents claimed on the return. If the IRS is auditing the dependents claimed on your 2020 return, it is unknown whether the portion of the EIP distribution that represents the dependent(s) in question may be withheld by the IRS. Remember, if this happens and it is later determined that the person is a qualified dependent, you can claim the missing payment amount as a Recovery Rebate Credit on your 2021 return.

One way to check your third stimulus payment status is through the Get My Payment portal on the IRS website. When you click on the portal, the IRS will verify your identity. Once your identity has been confirmed, the status of your third stimulus payment will be listed. If the IRS has processed your payment, the payment date and how it will be distributed (via direct deposit, check, or EIP card) will show. If you are eligible to receive the payment, but the IRS has not processed your payment, a payment date will not show.

The portal message may also read that the IRS needs more information before they can process the payment. This message could mean that the IRS attempted to send you a check, but the check was returned to the IRS by the postal service. The IRS does provide information on how to change or correct your address if you need to do so.

If the message on the portal indicates that there is no status available, this could mean the IRS has not yet processed your third stimulus payment. It can also signify that the IRS does not have enough information to process the payment or that you are not eligible for the payment. This message does not necessarily mean you will not receive the EIP distribution. Please wait a week or two and try accessing the portal again. The IRS is currently inundated with tax returns, processing EIP distributions, and conducting audits, so there is a significant backlog, and delays are longer than normal.

If your audit has got you overwhelmed, it is time to step out of the fog of confusion and into the capable hands of the tax professionals at TaxAudit. We provide pre-paid audit defense memberships.

Wishing you a successful audit, a swift third stimulus payment, and many happy returns,

Jean