The Internal Revenue Service regularly encourages Americans to file their federal tax returns as soon as possible, a nudge toward quicker refunds, avoiding identity theft and sidestepping processing delays. But just two weeks after the tax agency began accepting returns for the
In a little-noticed
The statement explained that the IRS was "aware of questions involving special tax refunds or payments made by states in 2022." At issue is whether billions of dollars sent by states to taxpayers last year to help them counter the effects of rising consumer prices should be treated as taxable income by the federal government. The tax collector said expects to provide clarity on the issue "for as many states and taxpayers as possible next week."
The surprise announcement injected fresh havoc into the filing season after two years of serious backlogs and delayed refunds.
"The IRS had plenty of time to determine whether this was an issue," said Jared Walczak, the vice president of state projects at the Tax Foundation, a think tank in Washington, D.C. "Waiting until tax season began and then simply raising a possibility throws tax season into chaos."
For financial planners with clients in affected states who have already filed their returns, the lack of clarity may prompt a big bureaucratic headache. While the sums at issue in states' rebate checks are relatively small, messing up an entry on a 1040 federal return can set into motion a series of processing delays and require a taxpayer to file an amended return. That in turn can delay a refund and throw a wrench into gifting and estate plans.
Robert Seltzer, an accountant in Los Angeles who specializes in personal financial planning, said his office was treating the California rebates as taxable for federal purposes. If the IRS decides that they're not taxable, clients who already filed their returns might have to submit an amended return — "a hassle," he said.
One thing's clear: If you've already filed your return, don't pick up the phone.
"For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS," the agency said in its surprise statement.
Not that dialing would get you anywhere: In 2021, as a mountain of unprocessed returns piled up when the COVID-19 pandemic sent many IRS employees home, the agency had one staffer to answer every 16,000 calls. Financial advisors and accountants say last year wasn't much better.
Any hiccup in filing or refiling a return is likely to get worse due to a nationwide shortage of accountants.
Paul "Hank" Scherf, a senior vice president of wealth management at Harris Private Wealth in San Jose, California, said the nationwide shortage of accountants means "it would be hard to find a CPA who has any free time to go do this — I mean, it'll probably be some time next year."
Last year, around a dozen states — California, Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois, Maine, New Mexico, South Carolina and Virginia — sent residents
Over last year and through the first two weeks of this year, California issued one-time "
While California says that the checks aren't taxable income for state purposes, they "
Walczak said that prior similar measures "tended not to be taxable income." But because the state rebates are not a reduction in a person's tax liability, "it creates the potential for federal taxation."
