Why is IRS telling taxpayers in California and Colorado to hold off on filing their taxes?

If you live in a state that offered tax rebates to residents during 2022, the IRS is advising that you delay filing your tax return for a few more days. States like California and Colorado passed legislation providing one-off payments in the form of tax refunds to residents to help deal with high inflation.

However it is not yet clear if tax rebates and special refunds should be considered taxable income for tax-filing purposes. The IRS is asking for filers to hold off on their submission until they have decided whether the payments should be subject to tax.

In a statement released on Friday, 3 February the IRS explained: “We are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers.”

“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.”

Tax relief programs pose a new question for tax agency

With inflation at historically high levels for much of 2022, a number of states opted to pass their own tax relief programs to provide a one-off rebate to residents. The most widely-used examples of these programs was California’s Middle Class Tax Refund, which has nearly concluded its run of payments.

More than 16 million Californians received checks worth up to $1,050 as part of the program, a significant contribution towards household finances. The legislation was passed at a time when residents were enduring rampant cost increases and record-high gasoline prices.

California is not the only state to offer such support, however, with Colorado, Illinois and South Carolina passing similar tax rebates in 2022. In many instances the state budget was bolstered by financial aid from the federal government during the pandemic.

The IRS began accepting tax returns for 2022 on 23 January but has now been forced to tell certain filers to delay their submission while it works out whether the relief payments count as taxable income. The agency says that anyone affected who has already submitted their return should not amend it at this stage.

The situation is far from idea in the middle of a stressful tax season for filers, and Rep. Kevin Kiley of California has called on the IRS to offer prompt guidance. In a publically available letter, he wrote:

“As federal tax deadlines loom, numerous constituents have contacted my office urgently asking for help getting information from your agency regarding whether payments under California’s Middle Class Tax Refund (MCTR) are considered income for federal tax purposes.”