IRS Confusion Causes Chaos for Taxpayers: Clearing Up Questions About State Payments in 2022 Tax Season

The IRS caused confusion among taxpayers when it advised them to hold off on filing their tax returns until they had resolved questions regarding special payments made by 21 states in 2022. These payments included one-time assistance payments and tax rebates. It was unclear why the agency didn’t determine this before the tax season started, as nearly 19 million people had already filed their 2022 returns as of Feb. 3, according to the IRS.

The good news Is that the IRS has since clarified that taxpayers in many states will not need to report these payments on their 2022 tax returns. Taxpayers in 16 states, including California, Delaware, and Pennsylvania, among others, won’t need to report the payments. Alaska’s Energy Relief Payment also won’t be taxable. Other states, including Georgia, Massachusetts, and South Carolina, have more nuanced instructions.

Based on a report by Fortune on February 14, 2023, the national taxpayer advocate wants the IRS to provide clear guidance to avoid confusion and frustration for taxpayers and professionals. Those who reported excepted payments as income may need to file an amended return, which is time-consuming and costly for taxpayers and the IRS.

Taxpayers can expect smaller tax refunds this year due to the expiration of COVID-19-related tax changes such as no federal stimulus checks, reduced child and dependent care tax credits, and no deductions for charitable contributions without itemizing. The IRS is advising e-filing to receive refunds more quickly, as paper returns may take up to six months to process. Taxpayers can track their refund status using the IRS’s Where’s My Refund? Tool after filing.