The IRS is warning taxpayers to delay filing in 20 states as it checks to see if they can tax special refunds.

Well, that’s all the early IRS promises that taxpayers can expect “improvements” when they file their 2022 returns this year.

Taxpayers in more than 20 states have had to delay filing their tax returns for now until the IRS settles how taxpayers in those particular states should report, if at all, money received from their states in special tax refunds or payments in 2022.

We are seeing one stunning mistake that has hooked tens of millions of taxpayers in states including California, Massachusetts and Virginia.

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The National Taxpayer Advocate published a highly critical blog Thursday questioning why the IRS waited so long to decide whether special tax refunds or payments would be treated as taxable income on a federal tax return. The same blog also states that the IRS did not provide timely guidance to change the reporting of payments over $600 on platforms such as Venmo and PayPal.

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The ongoing uncertainty about how to report a special tax refund is immediately affecting the lives of taxpayers in several states.

And I would imagine that in the future this could increase paper debt to the IRS if people in several states don’t figure out how to properly report their taxes soon.

“This has been a known issue,” wrote attorney Erin Collins, who is the “voice of the taxpayer” at the IRS.

Erin Collins, National Taxpayer Advocate, warned that it could actually take six to nine months to recover if you file your 2021 federal income tax return on paper.

Erin Collins, National Taxpayer Advocate, warned that it could actually take six to nine months to recover if you file your 2021 federal income tax return on paper.

“Failure to identify and resolve this issue prior to filing season suggests that someone or everyone was sleeping on the switch,” Collins wrote.

While waiting for a refund, it is recommended

Taxpayers are stuck in the ditch of filing season. If they’re dependent on getting a decent federal income tax refund early in the season, forget it. They need to delay filing as the IRS develops what experts say can be quite a complicated guide. The IRS is expected to release some word in the coming days.

If these taxpayers file early anyway, they risk miscalculating their taxes.

Tax software companies and tax professionals are also waiting for further IRS action.

Collins wrote that the impact of this type of delay is “hard to overestimate”. She said the IRS has known for months that there is uncertainty about the tax treatment of special government refunds, or payments that are processed in different ways in different states.

She wrote that some tax software companies have come to the conclusion that some government tax payments are tax deductible and have programmed their software in such a way that the payments are not counted.

Tax experts have told me that there is probably no one-size-fits-all answer that applies to every state. But general principles and tax rules will be taken into account to decide how the states paid out the money.

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Collins concluded that there are good reasons “to believe that many of these payments are tax-deductible for federal income tax purposes—either if the taxpayer did not receive a tax credit in the previous year, or under the “general social security exception.” provision”. “

For example, Virginia provided a one-time tax credit, she noted, and the state tax department’s website states that taxpayers who itemize deductions may be required to report the credits as income received on their federal income tax returns. Virginia says it will mail Form 1099-G as if someone received a state tax refund.

Approximately 9 out of 10 taxpayers use the standard deduction; the rest list deductions from the federal tax return.

Payment apps can confuse some

Collins also cleared up some confusion on question 1099-K regarding payment platforms.

Taxpayers across the country will wait and see again how the IRS handles the new reporting requirement for payments to third parties. Payment apps like Venmo and PayPal are used for personal reasons – like sending money for a child’s birthday – and for business reasons, like money paid to freelancers and others for goods and services.

You will pay taxes on money received from a job or business, not money from a child’s birthday. But users need to know how to distinguish and separate such payments. You don’t want to end up in a situation where you have to challenge Form 1099-K and say it’s wrong and ask your payment service provider to issue an amended Form 1099-K.

Congress wants to make sure taxable income is taxable and has raised the paperwork requirements for issuing Forms 1099-K under the American Plan of Rescue Act of 2021. The new reporting was to apply to transactions made in 2022 and beyond.

Collins said the IRS made the right decision to turn off the plug and delay the introduction of the new 1099-K threshold until the 2024 filing season. But she said the IRS could do more by working early on with the tax industry and others to meet the law’s requirements. The IRS issued guidance on December 28 that will be helpful going forward.

Contact Susan Tompor: [email protected]. Follow her on Twitter @tompor. To subscribe go to freep.com/special offer. More about business and subscribe to our business newsletter.

This article originally appeared in USA TODAY: IRS: Postpone filing after special tax refunds, payments

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