It was unusual yet satisfying to see Colorado’s congressional delegation band together in a bipartisan fashion, especially since the politicians were siding with taxpayers against an IRS move to tax TABOR refunds.
The federal agency quickly backtracked, and then it was politics as usual with Democrat U.S. Sen. Michael Bennet getting in front of the media to try and hog the credit.
This morning, I called the IRS Commissioner and urged him to continue the 30 year precedent of treating TABOR payments as non-taxable.
As Colorado families face higher food prices and energy bills, it’s unacceptable that the IRS would impose an additional tax burden on them. https://t.co/JMhK8bhrTQ
— Michael Bennet (@SenatorBennet) February 10, 2023
But it turns out this wasn’t just Colorado’s problem, or Colorado politicians who were in an uproar with the IRS.
The federal agency was moving to tax what it called “general welfare and disaster relief” payments in 21 states, including Colorado.
Basically, nearly half the country passed out pandemic relief checks, and Colorado got caught up in the mess because Gov. Polis and the Democrat legislature retooled our TABOR refunds as a reelection scheme called Colorado Cashback.
The Colorado media were quick to report the IRS has backed off, but taking a closer look at the agency’s decision, we’re not convinced they won’t ever come back to take another bite of the apple.
The agency did not say the method in which Polis distributed TABOR last year was not taxable. They ruled that under the circumstances, the pandemic and all, no state has to include it as a payment on our 2022 tax return.
If Polis and the legislature pull this stunt again, the IRS might not be as forgiving.
Here’s the IRS guidance:
General welfare and disaster relief payments
If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions is a complex fact intensive inquiry that depends on a number of considerations.
The IRS has reviewed the types of payments made by various states in 2022 that may fall in these categories and given the complicated fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for individuals who are now attempting to file their federal income tax returns, the IRS has determined that in the best interest of sound tax administration and given the fact that the pandemic emergency declaration is ending in May, 2023 making this an issue only for the 2022 tax year, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.
Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.
- Alaska [1]
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Hawaii
- Idaho
- Illinois [2]
- Indiana
- Maine
- New Jersey
- New Mexico
- New York2
- Oregon
- Pennsylvania
- Rhode Island
This close call with the IRS should serve as a lesson to Polis and the Democrat-controlled legislature to keep their hands off TABOR and not retool it again for their own reelection purposes