The federal watchdog for the Internal Revenue Service (IRS) faulted the federal agency for not giving guidance on how to handle state stimulus payments, which led to the IRS issuing an alert to taxpayers to delay filing a week ago.
Since issuing its alert on Feb. 3, the IRS has not yet provided “additional clarification” on how it will handle state rebate and refund payment programs as of Friday, Feb. 10.
“The impact of the delay in providing timely information and guidance is hard to overstate,” the Taxpayer Advocate Service (TAS), a federal agency within the IRS, said Thursday in a post. “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.”
Last week, the IRS called on millions of taxpayers to hold off on filing their returns and said that clarification would soon be issued. But the TAS said that it hasn’t come yet and should have been done long ago.
“For taxpayers who have already filed returns that reported the payments as taxable, they likely will need to file amended returns to exclude the payments if the IRS determines they are not taxable. That means they will need to spend time and money to file amended returns and then wait for their refunds, and it means the IRS will have to devote resources to processing amended returns and issue refunds,” the group said.
If the IRS determines whether the stimulus payments are taxable, the post said, “taxpayers will be subject to additional tax, interest, and potentially penalties.”
“The delay in providing guidance also means the IRS is likely to receive a significant number of telephone calls and some correspondence from taxpayers and tax professionals–something timely guidance would have prevented,” the TAS wrote.
The situation could have been prevented since the IRS has been aware of the tax issue around state stimulus payments for months, it said. For example, the state of California sent out some $9.5 billion for its Middle Class Tax Refunds in 2022 and noted that it could “be considered federal income,” adding, “You should consult IRS Publication 525, Taxable and Nontaxable Income, or your tax professional regarding the federal tax treatment of this payment.”
“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. “Yet to date, it has issued no specific guidance whatsoever.”
In the aforementioned Feb. 3 statement, the IRS said millions of taxpayers need to wait in certain states that gave out rebates and refunds.
“There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week. 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 statement said.
The agency further wrote that for now, “the best course of action is to wait for additional clarification on state payments rather than calling the IRS. We also do not recommend amending a previously filed 2022 return.”
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