IRS Warns Taxpayers in 22 States to Wait Before Filing

The agency needs more time to clarify rules surrounding state rebates.

It's that time of the year again. The Internal Revenue Service (IRS) kickstarted the 2023 tax season on Jan. 23, when it began accepting and processing returns. Less than a month out, some people have already filed their taxes and received their refunds. But if you haven't even thought about doing your taxes yet, don't worry: Most taxpayers have until April 18 this year to get things squared away. And for millions of Americans, the IRS is actually recommending waiting to file taxes because of uncertainty surrounding state rebates. Read on for the latest warning to taxpayers.

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Experts usually advise taxpayers to file on the earlier side.

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While many of us wait to file our returns close to the April tax deadline, tax experts typically advise filing sooner rather than later for several reasons.

For one thing, if you're expecting a refund, you can get your money faster by filing earlier, according to the experts at TurboTax. On Jan. 23, the IRS sent a "reminder to taxpayers to file electronically with direct deposit to speed refunds and avoid delays," noting that most people should receive their refunds within 21 days if they do so.

On the other hand, filing your return earlier can also come in handy if you're likely to owe taxes. "If you owe a balance due to the IRS, you may still have a good reason to file your tax return as soon as you can," TurboTax explains. "If you submit your return in the middle of January, you do not have to pay taxes you owe until the filing deadline."

But the IRS is now warning some people to wait.

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The IRS is superseding typical filing advice this year, however. On Feb. 3, the agency issued a statement warning some to hold off on submitting their 2022 returns right now. According to the notice, more time is needed to determine whether "special tax refunds or payments" made by certain states last year are federally taxable.

"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 agency said.

It's likely that this issue affects millions of taxpayers. Nearly two dozen states sent out stimulus-like payments or tax rebates to residents in an effort to counter record-high inflation in 2022, The Washington Post reported. In California alone, close to 16 million taxpayers received payouts as the state's middle-class tax refund distributed payments worth anywhere from between $200 to $1,050.

According to the newspaper, the Tax Foundation reports that a total of 22 states issued payments or rebates last year: Alaska, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Oregon, Rhode Island, South Carolina, and Virginia.

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The agency said it will provide clarity on this problem soon.

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The IRS is not planning to leave these taxpayers in the dark for long, as the agency said it is "working with state tax officials as quickly as possible" to determine specific guidelines.

"There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex," the IRS explained. "We expect to provide additional clarity for as many states and taxpayers as possible next week."

According to The Washington Post, the federal taxability of these special payments will likely vary by state depending on what they were initially intended for. For instance, if the payment was for pandemic relief, it may be exempt from federal tax because it would fall under disaster relief. But payments for inflation or other economic relief are likely federally taxable.

"It's all up to what the [state] legislature decided," Jared Ballew, director of government relations at Drake Software, told The Washington Post. "Was it for the benefit of that money, or is it like a tax refund, which would be taxable on a federal level?"

Filing an inaccurate tax return could lead to delays.

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You might be tempted to just go ahead and file your return, even if you're uncertain about the taxability of a special state-issued payment you received, but that may not be advisable.

"For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments," the IRS said, adding that taxpayers should not call the agency about this issue right now either.

Filling your taxes before you have all the information could put yourself at risk of getting your refund delayed. "Errors and omissions slow down tax processing, including refund times," the IRS warned in a Jan. 31 alert.

So, before doing your taxes, you should make sure that you're "ready to file an accurate and complete tax return," the IRS cautioned. "This can help avoid processing delays, extensive refund delays and later IRS notices."

Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.

Kali Coleman
Kali Coleman is a Senior Editor at Best Life. Her primary focus is covering news, where she often keeps readers informed on the ongoing COVID-19 pandemic and up-to-date on the latest retail closures. Read more
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