300,000 ineligible recovery rebate credit payments made

The Treasury Inspector General for Tax Administration (TIGTA) recently issued a report that should get every tax professional’s attention. In its Feb. 23, 2026, audit, TIGTA found that the IRS issued recovery rebate credit (RRC) payments to more than 300,000 ineligible taxpayers.

The numbers are significant. The audit identified 300,843 ineligible taxpayers who received $447.8 million in erroneous RRC payments. For practitioners, this isn’t just a headline. It’s a compliance issue that may soon land on clients’ desks in the form of IRS letters and refund offsets.

A quick refresher on the recovery rebate credit

The American Rescue Plan Act of 2021 created a refundable recovery rebate credit of up to $1,400 per eligible individual for tax year 2021. Advance payments, known as economic impact payments (EIPs), were issued in 2021. Taxpayers who did not receive the advance or did not claim the credit had until April 15, 2025, to claim it on an original or amended 2021 return. 

In December 2024, at the direction of the Department of the Treasury, the IRS announced it would issue automatic payments to certain taxpayers who had not claimed the credit. In January 2025, the IRS issued 1.2 million of these payments, totaling $2.4 billion. 

That’s where the problem began. 

Who received erroneous payments?

According to TIGTA’s findings, 25% of those January 2025 payments were issued to ineligible taxpayers. The largest category involved nonresident aliens who filed Form 1040-NR, U.S. Nonresident Alien Income Tax Return. TIGTA identified 225,028 such taxpayers who received $317.1 million. 

Other ineligible recipients included:

• Taxpayers who had already received an EIP or RRC for 2021
• ITIN holders who did not claim a dependent with a valid Social Security number for tax year 2021
• U.S. Territory residents
• Taxpayers whose 2021 adjusted gross income exceeded the phaseout threshold

TIGTA concluded that incomplete data and analytical errors contributed to these erroneous payments. In some cases, eligibility criteria were identified but not properly excluded in the payment process.

What happens now?

To recoup the payments, the IRS cannot use traditional collection tools, such as liens or levies, because these were administrative errors. Instead, the agency will rely on erroneous refund procedures. Impacted taxpayers will receive Letter 510C, Refund in Error; Return Checks, requesting repayment. 

If the amount is not repaid, the IRS will offset future refunds for up to two years from the date of the erroneous payment. As of May 2025, nearly 29,000 erroneous payments had already been recovered. The IRS agreed with TIGTA’s recommendation to ensure appropriate steps are taken to recover the payments. 

Why is this important to taxpayers?

First, expect client confusion. Many taxpayers who receive Letter 510C may believe they did nothing wrong. In many cases, they didn’t. The payment was generated by an IRS batch process, not by an affirmative claim on a tax return.

Second, refund offsets could catch clients off guard during filing season. A taxpayer expecting a refund may instead see it reduced or eliminated. Preparing clients in advance can prevent surprise and frustration.

Third, documentation matters. Practitioners should review 2021 returns carefully if a client receives a notice. Confirm eligibility under the statutory requirements, including filing status, income phaseouts and identification rules. If a client was truly eligible and the IRS removed the credit in error, you’ll need to respond promptly.

Finally, this report is a reminder of the risks tied to automated payment initiatives. TIGTA noted that although no future RRC payments are planned, the IRS should consider these concerns if similar advanced payments are issued in the future. As tax professionals, we’ve seen before how rapidly implemented relief programs can create downstream compliance issues years later.

Practical steps to take now

• Ask clients whether they received an unexpected RRC payment in early 2025.
• Watch for Letter 510C and calendar the response deadline.
• Explain how refund offsets work, along with the two-year recovery window.
• Retain documentation supporting eligibility determinations.

Relief programs like the refundable rebate credit were designed to move money quickly during unprecedented times. Speed, however, sometimes sacrifices precision. This TIGTA report is a clear example.

For tax professionals, the key is knowledge and preparation. When notices arrive and refunds are offset, clients will turn to you for answers. Understanding what happened and how the IRS plans to recover these funds allows you to guide them with clarity and confidence.