The IRS has asked a tax group for information from 21 states as it works to determine whether special tax refunds or payments that states made in 2022 as part of state pandemic relief measures are taxable for federal purposes. Meanwhile, the national taxpayer advocate on Thursday criticized the IRS for delaying a decision on a matter that she said could affect tens of millions of taxpayers.
In a statement issued Feb. 3, the IRS advised taxpayers in the states that provided relief to wait until it provided "additional clarity" before filing their tax returns.
"For taxpayers uncertain about the taxability of their state payments, the IRS recommends they wait until additional guidance is available or consult with a reputable tax professional," the agency said in the statement, in which it also advised against amending a previously filed 2022 return.
The Federation of Tax Administrators (FTA) said in an email to the JofA on Thursday that the IRS has inquired about programs in 21 states: Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, and Virginia.
"FTA will continue to work with our members as the IRS completes its legal analysis. Like you, we are anxiously awaiting a determination as the peak of the filing season is drawing near," FTA communications manager Joe Starr wrote in an email.
Also Thursday, National Taxpayer Advocate Erin Collins denounced the IRS for leaving taxpayers and tax professionals without guidance on the treatment of the special payments and refunds.
"The IRS has known for months that there is uncertainty about the tax treatment of these special state tax refunds or payments, and it has also known the answers may affect tens of millions of taxpayers," Collins wrote on her blog. "Yet, to date, it has issued no specific guidance whatsoever. … Giving taxpayers a choice between waiting to file their returns and receive their refunds or filing returns now that the IRS may later determine to be inaccurate is not acceptable."
Kenneth Corbin, the taxpayer experience officer for the IRS and its Wage and Investment Division commissioner, was asked whether the California middle-class tax credit is taxable at the federal level when he spoke Jan. 18 to the California Society of Enrolled Agents (CSEA).
"I believe that it is not taxable, but I'll have to figure out and confirm for you all how to report that on a federal tax return. We are aware that a number of the states have issued payment, not just California, but New York, Georgia, and Illinois, I believe," Corbin said.
"There are about 10 states that have issued payment, and I do not believe that it is taxable on a federal tax return. But I will make sure that we come back to you all with a specific way on how to report that so that you'll be able to get that on your client's return accurately."
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.