Colorado officials maintain TABOR refunds are not taxable amid IRS questions

Editor’s note: Newsline reported Friday afternoon, after this story was published, that the IRS decided not to treat Colorado TABOR refunds as taxable income.

Colorado officials are at odds with the Internal Revenue Service as it considers taxing Colorado’s Taxpayer’s Bill of Rights refunds, along with 18 other states’ special tax refunds. 

While state officials have remained adamant that TABOR refunds are not subject to federal income tax, the IRS has encouraged taxpayers who are uncertain about their state refunds to hold off on filing their taxes until the agency releases additional guidance. 

Every member of Colorado’s federal delegation signed a letter to IRS Commissioner Douglas O’Donnell asking the agency to treat the refunds as nontaxable income and maintain precedent from the past 30 years. 

Coloradans approved TABOR in 1992 to limit the amount of revenue withheld by the state, which in some years means taxpayers receive refunds. In 2022, refund payments totaled $750 for single-filers and $1,500 for joint-filers. Democratic U.S. Sens. Michael Bennet and John Hickenlooper, Democratic U.S. Reps. Yadira Caraveo, Jason Crow, Diana DeGette, Joe Neguse and Brittany Pettersen, as well as Republican U.S. Reps. Lauren Boebert, Ken Buck and Doug Lamborn, all signed the letter. 

“Historically, the IRS has never considered such payments as taxable income since the amendment was ratified in 1992 —over thirty years ago,” the letter reads. “Expecting Coloradans to now pay part of these revenue payments back would impose a significant burden on Colorado taxpayers, introduce considerable compliance costs for taxpayers who did not anticipate having to add their TABOR revenue payments to their joint or single filings, and cost Coloradans hundreds of additional dollars in tax liability.” 

The Colorado Department of Revenue also issued a statement saying it does not believe what the state called Colorado Cashback refunds are subject to federal income tax. 

“Colorado believes it is well positioned to make the argument that their refunds should be nontaxable,” the statement reads. “TABOR requires the state to return ‘excess state revenue’ to taxpayers through multiple refund mechanisms and Colorado has done so on numerous occasions and through various statutory methods since 1992. The IRS has never attempted to tax TABOR refunds in the past 30 years.”

The Department of Revenue said it’s been in contact with the IRS to answer questions about the refunds and defend its stance on the matter. 

“It is incomprehensible that the IRS would threaten to take money out of the hands of hardworking Coloradans,” Neguse said in a statement. “We must ensure the IRS does not impede the revenue structure that Colorado voters have adopted, which would not only create confusion in the middle of tax season but impose significant cost burdens on Colorado taxpayers.”

Bennet — who chairs the Senate Finance Committee’s Subcommittee on Taxation and IRS Oversight — spoke with O’Donnell over the phone Friday morning as well, explaining why it doesn’t make sense to tax the TABOR payments. 

“As Coloradans struggle with higher food prices and energy bills, it’s unacceptable that the IRS would change course after three decades and impose an additional tax burden on Colorado families,” Bennet said in a news release. “It is even more absurd that the IRS is considering this change in the middle of filing season. My office has calculated that this could end up costing Coloradans $400 million this year alone.”