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‘Not acceptable:’ IRS watchdog calls out agency’s latest misstep

The Internal Revenue Service regulator has blasted the agency for failing to provide timely guidance on federal stimulus payments, creating unnecessary complexity for millions of American taxpayers this tax season.

“It’s hard to overstate the impact of the delay in providing timely information and guidance,” Erin M. Collins, the National Taxpayer Advocate, wrote in a blog Thursday. “Giving taxpayers the choice of either waiting for their returns to be filed and receiving their refunds or filing returns now that the IRS may later determine are inaccurate is unacceptable.”

Nearly three weeks into filing season, the IRS has yet to issue guidance as to whether the states’ tax rebate reviews filed last year are taxable income on their federal returns. The agency just last week acknowledged the problem of state tax liability, saying taxpayers should wait to file their tax returns and that clarification would come soon.

But not soon enough, according to the taxpayers’ advocate.

Internal Revenue Service sign with a traffic light in the foreground indicating a red light.

(Photo: Getty Creative)

“The IRS has been aware of the problem for months”

Taxpayers, tax professionals, and even tax software companies need time to prepare for the new laws and regulations. And Americans who have already filed taxes may have to shoulder the burden of correcting tax returns because of the late guidance. The situation is even worse for families who count on tax refunds for everyday needs.

“Because refunds can represent up to 30% of a low-income family’s annual income, delays in tax season can seriously impact the financial well-being of low-income and colored households,” said Joanna Ain, associate director for policy at the nonprofit Prosperity Now , previously to Yahoo Finance. “These payments can be lifelines for households, help families meet daily needs and be used to build emergency savings.”

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That outcome could have been avoided, Collins said, because the IRS has known about the tax issues surrounding federal stimulus payments for some time. More than 20 states gave out these tax refunds, rebates, and extended credits in 2022, and many households received money under the state programs.

California alone paid out nearly $9.5 billion on its middle-class tax refunds in 2022, declaring that the amount is not taxable for state purposes but “may be considered federal income.”

“The IRS has known for months that there has been uncertainty about the tax treatment of these particular federal tax returns or payments, and also knows that the responses may affect tens of millions of taxpayers,” Collins wrote, not issuing any specific guidance.”

Not the first time this season

This is the second time in recent memory that the IRS has made a premature decision.

In late December, the IRS backed out of introducing the new $600 filing threshold for 1099-K tax forms, a change that caused “a lot of confusion and a lot of fear and more administrative work,” according to Tom O’Saben, a registration agent and director of Tax Content at the National Association of Tax Professionals, he previously told Yahoo Finance.

The new 1099-K reporting rule required third-party transaction networks such as Venmo, Paypal, eBay and Etsy to issue a 1099-K to users with more than $600 in payment transactions during the year. This new rule would have impacted millions of taxpayers considering how many Americans use these platforms, but the amounts listed on the 1099-K forms may not have been taxable depending on the circumstances.

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“The IRS must be proactive and timely in issuing guidance and raising awareness,” Collins wrote.

Rebecca is a reporter for Yahoo Finance.

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