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Two Recent IRS Decisions Benefit Taxpayers But Diminish Federal Coffers

S.J. Steinhardt
Published Date:
Feb 27, 2023

Two decisions by the IRS meant to help taxpayers could end up costing as much as $4 billion at a time when the country really needs the money, The New York Times reported.

On Feb. 10, the IRS issued guidance announcing that special payments related to general welfare and disaster relief made by several states—including New York—are not taxable. The IRS guidance explained 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.” In total, 21 states shared their federal stimulus money by sending their residents one-time relief payments, and those payments are not taxable. 

Those payments came to a total of about $25 billion, money on which taxpayers do not have to pay tax—and that amounts to roughly $3 billion to $4 billion in lost tax revenue, according to the conservative Tax Foundation and the nonpartisan Institute on Taxation and Economic Policy, the Times reported.

This comes as the inflation still rages and the country may default on its debt if Congress does not authorize a raise in the debt ceiling.

That’s not the only decision that adversely affected the budget outlook. Late last year, the agency delayed implementing a rule that would require businesses using payment cards and third party payment systems to report all income in excess of $600.

While the $4 billion is a fraction of the $4.9 trillion of revenue that the government collected last fiscal year, every penny seems to count if the government is to avoid default.

As the government maneuvers to avoid a such a situation in the absence of action by Congress, the Bipartisan Policy Center warned the Treasury Department that it could run out of cash by early summer, depending on tax receipts.

“In the event of much-lower-than-expected revenues through tax season, there is a small chance of a ‘too close for comfort’ situation prior to quarterly tax receipts due on June 15,” the Center said, according to the Times.

While the IRS’s changing stances on taxing the state payments may have cause confusion, it made the right decisions, some experts told the Times.

“The IRS is right not to insist on strict applications of the rules given the need to resolve the uncertainty without further disruption,” said Jared Walczak, the vice president of state projects at the Tax Foundation.

“The people that this is most useful for, in my mind, are lower-income families, who may not have had much of a tax liability in the first place,” said Kim S. Rueben of the Tax Policy Center.

Exceptions still remain. Alaskans do not need to report a one-time energy relief payment on their tax returns, but do need to report the Permanent Fund Dividend that the state sends to residents. Residents of Georgia, Massachusetts, South Carolina and Virginia do not need to report payments if they meet certain requirements.

“It would be fair for taxpayers to ask why the IRS did not make a blanket statement of nontaxability,” said Walczak.

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