IRS Says Taxpayers in Some States May Be Eligible for Bigger Refunds

The Internal Revenue Service headquarters building in Washington, D.C. (Chip Somodevilla/Getty Images)

The Internal Revenue Service (IRS) said Tuesday that taxpayers in nearly two dozen states should consider filing amended tax returns because they may have needlessly reported income from relief payments and so stand to get bigger refunds.

The IRS said in a press release that taxpayers who reported certain state payments related to general welfare and disaster relief as taxable income on their tax returns did so, in many cases, unnecessarily.

That’s because the IRS earlier this year made a determination that “in the interest of sound tax administration and other factors,” taxpayers in the states in question didn’t need to report these special payments in 2022 and the IRS won’t challenge their taxability.

All told, taxpayers in 17 states don’t have to report last year’s stimulus and relief checks, while in another four states, many people will be able to avoid paying federal taxes on special payments that they received provided that they meet certain requirements.

Taxpayers in the following states don’t need to report any state payments related to general welfare and disaster relief: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island.

Alaska is also in this group, although the payments covered by the IRS notice apply only to special supplemental Energy Relief Payments.

In addition, four states are special cases in terms of relief payment taxability because they issued such payments in the form of refunds of state taxes paid: Georgia, Massachusetts, South Carolina, and Virginia.

“For these individuals, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and the recipient either claimed the standard deduction for tax year 2022 or itemized their tax year 2022 deductions but did not receive a tax benefit,” the IRS said.

Taxpayers who meet the above criteria and needlessly paid tax on special state payments can file an amended return either electronically or in paper form. Electronic filers can opt for a direct deposit, while paper filers can expect a paper check for any resulting refunds.

With the April 18th tax deadline approaching, the IRS also released information to debunk common tax-filing myths.

Tax-Filing Myths

One common myth is that taxpayers do not need to report income if they did not receive a Form 1099-K.

“All income must be reported unless it’s excluded by law,” the IRS said, regardless of whether taxpayers receive certain forms or not.

This includes income from self-employment or other business activities, investment income, and part-time or seasonal work.

Another myth is that if a taxpayer requests an extension, they do not need to do anything until Oct. 16. An extension to file is not an extension to pay any tax due, and tax balances are still due on April 18, the IRS said.

The IRS also stated that it encourages taxpayers to use the “Where’s My Refund?” tool to check the status of their refund instead of calling or visiting the IRS in person. The mistaken belief that calling or visiting the IRS personally will speed up the refund process is another myth the agency sought to debunk. Ordering tax transcripts will also not help speed up refund processing, the IRS said.

Another myth is that taxpayers don’t need to adjust their withholding for 2023 if they received a refund this year. Taxpayers should frequently check their withholding and adjust accordingly, especially during life events such as marriage, divorce, childbirth, adoption, or home purchase, the tax agency said.

Ask for a Six-Month Filing Extension

While the deadline to file a tax return falls on April 18, all taxpayers are eligible to apply for a six-month extension.

Taxpayers who owe the IRS money, but don’t request an extension and miss the April 18th deadline to file, face a failure to file penalty.

In terms of the failure to file a penalty, the IRS normally charges 5 percent of the unpaid tax due for each month that they’re late with the payment. The maximum late penalty will never be greater than 25 percent of one’s unpaid taxes.

Taxpayers can avoid a failure-to-file penalty by filing their taxes by the original deadline or the extended deadline.

For those who don’t owe the IRS any money or have a refund coming, there is no penalty for failing to file a federal tax return by the deadline. This may not be the case for state taxes, however.

Still, there are a few good reasons to file a tax return even if no money is owed to the IRS.

Those who have a refund coming won’t get the money until they file, and people who don’t file within three years of the original due date can lose the refund.

Also, the statute of limitations for the IRS to audit a tax return doesn’t start running out until a tax return is filed.