Error in IRS data transfer tool/unemployment taxation

Kat50
Fri, 11 Feb 2022 08:14:01 +0000

I just learned from one of my son’s EA colleges that there is apparently a discrepancy in the IRS FAFSA transfer tool with regard to taxation of unemployment compensation. We received unemployment compensation in 2020 and filed our 2020 taxes early, in February 2021. Initially, unemployment compensation was treated as taxable income by the IRS. Once Congress voted to make 2020 unemployment compensation nontaxable, we were advised NOT to file an amended tax return and that the IRS would automatically make the adjustment on their end and refund any monies owed, if applicable. The IRS later gave us a small refund on the unemployment taxes paid a few months later (I think we received it in August 2021). I would have thought they would automatically update their tax records to reflect this adjustment. However, in November, we used the IRS automatic transfer feature to automatically import our 2020 income into FAFSA. Apparently, the IRS import feature did NOT update to reflect the change in the treatment of unemployment income. So when we filed FAFSA, it imported the incorrect information. On the other hand, when we completed CSS, we based it on the updated tax return, so that information was accurate. I now realize that we’ve unknowingly sent the erroneous information to several other schools. Is anyone familiar with this situation? Should we go in and delete the auto-import from the IRS and manually replace the entries for unemployment income in 2020? I was always told that it’s much better to use the IRS income retrieval tool rather than manually entering the values, so I hesitate to delete the automated import. Should we also contact the colleges individually to let them know that the CSS taxable income is correct but the FAFSA taxable income (and tax paid) is off by the amount of unemployment compensation? It’s so annoying that FAFSA doesn’t permit users to view the actual VALUES that are imported from the IRS to make sure they’re correct!