IRS to some: Delay tax filing until state rebate question is resolved

Millions of taxpayers — including some New Yorkers — are in limbo after the IRS said it had yet to decide whether special 2022 state tax rebates or stimulus payments would be taxed.

The IRS, which has reached out to tax authorities in at least 21 states, has called on recipients of those payments to delay filing their returns until the agency makes a ruling.

The two-paragraph advisory on the IRS website does not specify which states are under examination.

"There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex," the IRS message says. "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. For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification."

The agency advised those who already filed their returns to sit tight until the issue is resolved — and not file an amended return (which ultimately may not be required).

The Federation of Tax Administrators, a Washington organization that works with state authorities, provided a list of 21 states whose officials had been queried by the IRS (though the FTA said it could not offer a definitive list of all the states the IRS is evaluating): Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina and Virginia.

In October, the New York State Department of Taxation and Finance said it had begun mailing checks totaling $475 million in additional child and earned-income tax payments to about 1.8 million people. Those checks, averaging roughly $270, went to low- and middle-income New Yorkers who received the Empire State Child Credit or the earned-income tax credit, or both, on their 2021 state tax returns.

The state agency did not respond to a request for comment.

The IRS, which issued the advisory on Feb. 3, said it expected to "provide additional clarity for as many states and taxpayers as possible" this week.

One factor the IRS is likely to examine is the intent of the state payments. Payments for disaster relief typically are not taxable, while those for inflation or other economic relief could be taxable.

Lynne M. Fuentes, managing partner of Fuentes & Angel CPAs LLC in Jericho and president of the New York State Society of CPAs, said New Yorkers who received those payments should abide by the IRS' advice and put off filing their taxes.

"I'd hold off for further clarification from the IRS," she said.

David Frisch, a certified public accountant at Melville-based Frisch Financial Group Inc., said it's unclear why the IRS did not resolve the issue sooner.

"Had they given the guidance in advance, it would have been helpful," he said.

Frisch said the timeout from the IRS could harm some early tax filers who are expecting a refund.

"They're waiting for the money that they really need," he said. "It hurts the middle class."

The IRS began accepting 2022 tax returns on Jan. 23.

The delay also could back up tax preparers, Frisch said, with little more than two months to go before the April 18 tax deadline.

By Ken Schachter

kenneth.schachter@newsday.comkschach

Ken Schachter covers corporate news, including technology and aerospace, and other business topics for Newsday. He has also worked at The Miami Herald and The Jerusalem Post.