The Internal Revenue Service headquarters building appeared to be mostly empty April 27, 2020, in the Federal Triangle section of Washington, D.C.(Chip Somodevilla/Getty Images)
Federal officials are once again floating a plan to treat refund payments made to Coloradans under the Taxpayer’s Bill of Rights as taxable income, and state leaders aren’t happy about it.
In a notice issued Wednesday, the Internal Revenue Service proposed guidance on how it will treat payments made by a variety of state refund and benefit programs in the 2023 tax year. The guidance doesn’t contain a clear exception that would allow filers to exclude TABOR payments from their federal gross income next year and beyond.
In a statement, Gov. Jared Polis said his administration “strongly disagrees with the IRS guidance,” which would reverse nearly 30 years of precedent in how the IRS treats Colorado’s refund mechanism. The TABOR amendment, which mandated the refunds alongside a variety of other anti-tax measures, was approved by Colorado voters in 1992.
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“This absurd potential action from the IRS would cost Coloradans money and confuse people, and I call on the Biden administration to reverse course,” Polis, a Democrat, said. “The IRS is proposing going back on thirty years of not treating TABOR refunds as taxable income.”
The IRS first raised the possibility of taxing the payments earlier this year, when it warned residents of Colorado and 20 other states to hold off on filing their 2022 tax returns while the agency finalized its guidance. Many of the states in question had issued special tax refunds or relief payments using pandemic-era aid funding.
Colorado elected officials from both parties decried that guidance and its timing, after the 2022 tax filing season had already begun. Within days, the IRS backed off, declaring that “in the interest of sound tax administration and other factors, taxpayers in many states will not need to report these payments on their 2022 tax returns.”
Despite continued pressure from Colorado leaders, however, the new guidance revives the potential for TABOR refunds to be taxed beginning this year.
The structure of 2023 TABOR refunds is tied to the outcome of Proposition HH, the property tax measure on the November ballot. If the ballot measure is approved, Coloradans will receive another round of flat-rate refund checks, repeating the formula that lawmakers opted for last year. If Proposition HH fails, the formula would revert to a tiered structure, with higher-income taxpayers getting larger refunds.
The IRS notice requests comments on the application of its rules, which states and members of the public can submit through Oct. 16.
“After considering the comments, the Department of the Treasury and the IRS intend to issue further guidance on the Federal income tax consequences of State payments,” the notice said.
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