An IRS Clawback?

It only took two paragraphs on an IRS web site to cause, social media and mainstream news media to erupt. Of course, taxes, especially those that are unpopular, are always good copy.

"The IRS is aware of questions involving special tax refunds or payments made by states in 2022; we are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers. There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week.

"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 on state payments rather than calling the IRS. We also do not recommend amending a previously filed 2022 return."

Citizens in nearly half the states of the union may be impacted by those two paragraphs, and few are happy. A recent headline in Maine's Portland Press-Herald proclaimed that state officials had "no idea" their payments back to taxpayers could be taxable. Maybe the IRS itself didn't, either.

Here in Massachusetts, the loudest cry of complaint so far has come from Mass Fiscal Alliance, a self-proclaimed watchdog and an organization of an avowed fiscal conservative stripe.

Following statements from the Internal Revenue Service (IRS) that taxpayers should hold off filing their federal taxes while the agency makes up its mind on how to handle the multitude of state tax rebates that were issued last year, "the Massachusetts Fiscal Alliance is calling on the IRS to keep their hands off of people’s hard-earned rebates," the organization thundered.

“This money is supposed to be a tax rebate because the state collected such an egregiously large amount of money last year, but now the federal government is trying to pick the taxpayer’s pockets to get every possible crumb. It’s sending major mixed messages,” noted Paul D. Craney, spokesman for the Alliance.

“Our federal government should be projecting stability and tax relief—instead, people have already begun filing their taxes and they’re equivocating on something that they’ve had over a year to prepare for. It’s extremely problematic that the agency would try to make an ex-post facto decision after many returns have been filed to take money out of people’s pockets,” said Craney.

“If the IRS wanted to tax people’s refund checks, they should have been upfront about it. They weren’t. As it stands now, they should let this issue go and let people enjoy their refunds in peace,” growled Craney.