The Internal Revenue Service (IRS) has issued a warning to taxpayers in 20 states to hold off filing their tax returns as the agency investigates whether it can tax special refunds.
The warning comes as the IRS announced that California’s middle class taxpayers do not need to report their tax refunds as taxable income. This decision was made after the state legislature passed a law to allow the refunds to be exempt from taxation.
The IRS is also looking into whether it can tax other special refunds, such as those from the federal government’s inflation relief checks. The agency has not yet determined whether it can tax these refunds, but it is urging taxpayers in 20 states to wait until it has made a decision.
In addition, the IRS watchdog has called out the agency for its latest misstep, which has caused confusion among taxpayers. The agency has not provided clear guidelines on how to report refunds, leading to delays in filing returns.
Taxpayers in California and other states should take the IRS’s warning seriously and wait until it has determined whether it can tax special refunds before filing their taxes.