Tax pros still in limbo after IRS tells millions who received state rebates to pause filings

Tax season is underway but millions of filers who received state tax rebates or payments are in limbo after the IRS told taxpayers to pause on filing returns.

The reason for the delay hinges on one question: Are these payments taxable on federal returns? Filers in more than 20 states still don’t have an answer.

“There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex,” the IRS said in a statement last week.

The agency said it expected to provide additional clarity for “as many states and taxpayers as possible” this week. In the meantime, the IRS said affected taxpayer should hold off on filing or “consult with a reputable tax professional.”

The problem is, tax professionals are also waiting for guidance from the IRS.

In California, more than 16.5 million taxpayers have received the “middle-class tax refund,” according to the state’s Franchise Tax Board. These payments aren’t taxable at the state level, but questions remain about federal taxability.  

“I think what’s frustrating for us is they knew states were issuing stimulus payments in 2022,” said Dan Herron, a San Luis Obispo, California-based certified financial planner at Elemental Wealth Advisors. He is also a certified public accountant.

“They knew it was coming and they did nothing until now,” he said. “Why bother opening the filing season if you’re not even ready?”

An estimated 3 million Massachusetts taxpayers who received the Chapter 62F refund are also waiting. The state said the payments are federally taxable for filers who itemized deductions in 2021, but some tax professionals are postponing returns until there’s clear guidance from the IRS.

“We always assumed it would be [federally] taxable,” said Steven Fafel, a certified public accountant at Leonard Fafel CPA, PC in Salem, Massachusetts. But he wants to make sure filings are correct to avoid amending returns later.

The National Taxpayer Advocate, Erin Collins, criticized the delay in a blog post Thursday. “Giving taxpayers a choice between waiting to file their returns and receive their refunds or filing returns now that the IRS may later determine to be inaccurate is not acceptable,” she wrote.

CNBC has reached out to the IRS for comment.