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Confusion over relief payments puts millions of Californians in tax limbo

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Posted at 8:55 PM, Feb 09, 2023

The IRS is urging millions of taxpayers to wait on filing their returns.

It’s only February and it’s already a confusing tax season for Californians who received inflation relief payments.

“There’s a lot of confusion for taxpayers filing their tax returns,” said David Hofstetter, who is an enrolled tax agent.

If you received an inflation relief payment from the state, you may want to hold off on filing your tax return and wait until the IRS issues updated guidance.

“I received the check, and I already filed my income tax,” said San Luis Obispo Resident Jan Wilson, who is one of many Californians now in tax limbo.

“I think it is frustrating because a lot of people have already filed their taxes and now, they’re saying that we might have to amend them. That’s gonna be more work for the IRS,” she said.

The confusion comes down to whether special payments from the state can be taxed by the federal government.

“The state specifically said, ‘these payments are not taxable at the state level.’ We don’t know what the federal government’s going to do,” said Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals.

Tax experts say that a delayed response from the IRS is making an already complicated process even more complicated.

“The problem now is that the IRS has not yet issued guidance and it’s very late in the tax season,” explained Hofstetter.

Inflation relief payments between $200 and $1,050 went out to millions of Californians between October and January.

The IRS asked taxpayers to hold off this week.

“Why is the IRS just doing this now? I don’t think they were aware of it because they weren’t the ones who sent the money out,” explained O’Saben.

The National Association of Tax Professionals says that a flood of questions surrounding special refunds likely prompted the guidance.

“They don’t want another influx of amended returns,” said O’Saben, who adds that the IRS is trying to avoid a backlog in amendments to tax returns that can take months, or even years to sift through.

“When you electronically file an amended return, it really isn’t electronically filed. It’s electronically submitted, then they have to manually process it,” he explained.

If the IRS decides special payments do not fall under the federal income tax, then you don’t have to do anything.

If relief payments are taxable, then you will need to claim the money as income on your tax return, which involves filing for an amended return if you’ve already done your taxes.

Experts say this will all come down to whether relief payments provided an economic benefit to taxpayers.

The IRS is expected to release updated guidance by the end of the month.