IRS says most 2022 one-time refunds won’t be taxed

Maybe pigs can fly.

The IRS, in an unusual statement late last week, said that millions of dollars in 2022 special state payments to individuals in 21 states will not have to be reported as income.

This followed by days a notice that the Internal Revenue Service told taxpayers to hold off on filing until it could decide if the special checks should be counted as income. The notice, some called it a threat, threw a curve to tax software companies, early filers, and those expecting tax refunds, with some on social media decrying the thought of the government levying taxes on money already taxed in some cases.

At issue were millions of dollars in “general welfare and disaster relief payments,” the IRS said, which included rebates to taxpayers in states that reported huge budget surpluses. The payments averaged $350 per person, the government said.

'Interest of sound tax administration' cited

“The IRS has determined that in the in the interest of sound tax administration and other factors, taxpayers in many states will not need to report these payments on their 2022 tax returns,” the IRS said in a statement issued Friday.

The states in question included California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Alaska.

Taxpayers in four other states – Georgia, Massachusetts, South Carolina, and Virginia – will not need to include state payments for federal tax purposes, but with some caveats. The IRS said filers in those states, the payments will not be counted as income if the payments were tax refunds and either “the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.”

Why the IRS waited so long to clarify or even mention the taxability of state payments remains a mystery.

“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,” the Taxpayer Advocate Service wrote in a blog post last Thursday. “Yet to date, it has issued no specific guidance whatsoever.”

The agency didn’t acknowledge the issue until Republican California Congressman Kevin Kiley said his office had been contacted by numerous constituents with questions on the matter.

"Many of the 16 million residents of California who received the refund are unable to file a 2022 tax return because they do not have clear guidance as to whether to include this payment" as taxable income, he wrote in a letter to the IRS.

A sudden change in plans

The agency first said it would be weeks before it came to a decision about the tax payments but then suddenly dropped its ruling several days later and hours after the Tax Advocate blog post.

“While the IRS deserves credit for the volume of guidance it provides, there are times when it delays or fails to issue timely guidance and thereby creates serious problems, including uncertainty and confusion, for taxpayers, tax professionals, and tax software developers,” the blog said.

For its part, the IRS said it some who were understanding.

“The IRS appreciates the patience of taxpayers, tax professionals, and software companies and state tax administrators as the IRS and Treasury worked to resolve this unique and complex situation,” it said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].