Well, so much for early promises by the IRS that taxpayers could expect to “experience improvements” as they file their 2022 returns this year.
Taxpayers in more than 20 states were warned last week by the Internal Revenue Service to hold off filing their tax returns for now until the IRS irons out how the taxpayers in those specific states should report, if at all, money received from their states through special tax refunds or payments in 2022.
We’re looking at one mind-boggling blunder that puts tens of millions of taxpayers on the hook in states that include California, Massachusetts and Virginia.
Tax software companies and tax professionals are waiting to see what move the IRS takes next, too.
Some tax software companies have concluded that some state tax payments are not taxable and have programmed their software so the payments are not reported.
Tax professionals told me that there likely isn’t a one-size-fits-all answer here that can apply to every state. But general guidelines and tax rules will be taken into account to address how states paid out the money.
Taxpayers are stuck in a filing season ditch. If they’re depending on getting a decent size federal income tax refund early in the season, forget it. They need to delay filing a return as the IRS works out what experts say could be fairly complex guidance. The IRS is expected to issue some word in the coming days.
The National Taxpayer Advocate issued a highly critical blog Thursday that questioned why the IRS waited so long to address whether special tax refunds or payments will be treated as taxable income on a federal income tax return. The same blog also stated that the IRS failed to provide timely guidance involving a change in reporting of payments of more than $600 on platforms, like Venmo and PayPal.
If these taxpayers file early anyway, they risk doing their taxes wrong.
Here are the states affected by this news:
At least 22 states authorized tax rebates last year as their coffers were buoyed by strong economic growth and federal pandemic aid, according to the Tax Foundation. The following states sent rebate checks to at least some of their taxpayers last year, the Tax Foundation said:
- New Jersey
- New Mexico
- New York
- Rhode Island
- South Carolina