IRS warns millions to hold off on taxes: What’s happening with guidance on state payments?

After a relatively smooth start to the 2023 tax season, the Internal Revenue Service (IRS) is throwing a curveball at millions of taxpayers who received state-level stimulus checks and other special payments from their home states last year.

Some 18 states issued one-time tax rebates in 2022, according to the Tax Policy Center. A more recent count from the Taxpayers Advocate Service says residents of more than 20 states received special payments or refunds, which ranged significantly in size and scope. The problem? No one seems to know if these payments are taxable at the federal level, including the IRS. Some states—California and Virginia, for instance—insist that they probably are.

In an update note posted on February 3 (already almost two weeks into tax season), the IRS said it was working with state tax authorities to hash out the details, so it can offer additional clarity to taxpayers. Guidance is expected this week for as many states as possible. In the meantime, the IRS has essentially told taxpayers who received one of these payments that they should hold off on filing their taxes until that guidance is offered.

Oh, and if you’re one of the millions of taxpayers who already filed, don’t even think about picking up a phone. “[The] best course of action is to wait for additional clarification on state payments rather than calling the IRS,” the agency said. “We also do not recommend amending a previously filed 2022 return.”

This outstanding uncertainty obviously threatens to throw taxpayers, tax professionals, and the IRS itself into a massive state of disarray at a time when it finally seemed to be getting a grip on the pandemic-era chaos that had plagued it over the past three years. The agency has been working feverishly to hire more staff, modernize its antiquated technology, and winnow down literal mountains of backlogged paper tax returns.

And now? Well, now this is happening.

“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,” Erin M. Collins, the national taxpayer advocate, said in a blog post on Thursday. “The impact of the delay in providing timely information and guidance is hard to overstate.”

So when exactly can taxpayers expect updated guidance on the taxability of state payments? With the week almost over, that remains unclear. Reached for comment by Fast Company, an IRS spokesperson did not have any immediate details about when new information would be shared. That said, it’s not uncommon for such guidance to appear quietly on the IRS website late on a Friday.

We will update this post with more details as soon as we have them.

This story is developing. This post has been updated with new information.