Stimulus Update: Are Stimulus Payments Causing Tax Headaches?

Stimulus funds have been a lifeline for Americans, but they may also result in tax complications.

The stimulus checks that began hitting Americans' bank accounts in March have helped millions of families stay afloat and shore up their finances during the pandemic. But there may be one unexpected consequence resulting from those payments -- more tax issues for those who file a return.

The IRS sent about 9 million math error notices to taxpayers between Jan. 1 and July 15 of this year, up from 628,997 during the same time frame last year, according to Taxpayer Advocate Service. And about 7.4 million of those notices were related to stimulus payments.

Math error notices generally mean that the IRS wants to make an adjustment to a filer's tax return. That could mean that a filer is entitled to a higher or lower refund than what was initially claimed, or that a filer owes more or less money than what was initially listed. And so getting a math error notice from the IRS isn't always a bad thing, because sometimes, it results in a taxpayer getting more money back from the agency. But either way, it's clear that the distribution of stimulus funds has already caused a lot more paperwork -- and in some cases, headaches -- for taxpayers and the IRS alike.

Compounding the problem is that some of the notices the IRS has been sending out have lacked clear details as to what the problem at hand is. That's leaving taxpayers worried and confused.

Furthermore, getting in touch with the IRS is easier said than done. It's common for people who call the IRS to experience lengthy hold times -- that is, if they can reach a live person at all.

Child Tax Credit payments likely to cause similar issues

Stimulus checks aren't the only extra money Americans have been getting this year. Thanks to the newly expanded Child Tax Credit, many parents have already received two monthly installment payments that max out at $300 for children under the age of 6 and $250 for those aged 6 to 17.

Previously, the Child Tax Credit was paid as a single lump sum in tax refund form. This year, half of the credit is being paid out monthly, with the first payment having gone out in July. The remaining half will be paid in 2022. Those payments may result in their own share of IRS notices -- and confuse a lot of taxpayers in the process.

Either way, if you get a letter from the IRS saying there's an adjustment the agency wants to make to your taxes, read it carefully. It may be that the IRS wants to give you more money back.

If the opposite happens, and you're told you've underpaid your taxes, consult with an accountant who can help you figure out what to do. If you don't have an accountant and you don't qualify for free tax help through programs like VITA, then you may need to brave a long wait and contact the IRS directly. But it's important to know what you're agreeing to before going along with an IRS letter, especially if the details are unclear.