Colorado taxpayers don’t have to worry about Uncle Sam coming for a cut of their state tax refunds.
The Internal Revenue Service urged Coloradans late last week to hold off on filing their taxes while it sorted out late-summer payments of state tax refunds. The refunds come from state taxes collected in excess of caps set by the Taxpayer Bill of Rights, or TABOR.
The guidance sparked outrage from Colorado officials, including a letter from all 10 members of Congress. Gov. Jared Polis and U.S. Sen. Michael Bennet said they also personally called the acting commissioner of the IRS to protest the break with the 30-year precedent of TABOR refunds not being taxed.
The IRS sent an updated guidance Friday afternoon saying it wouldn’t touch the payments — though it classified them as “general welfare and disaster relief payments,” and not state tax refunds.
“We, like millions of Coloradans, are breathing a sigh of relief that the IRS and federal government have stepped away from taxing our refunds this year,” Polis said in a statement. “This ultimately is the best outcome for families and individuals and we will continue seeking out more ways to save people money.”
Bennet’s office had estimated taxing the TABOR payments could cost Coloradans as much as $400 million.
“The last thing Colorado families need right now is a $400 million tax increase,” Bennet said in a statement. “… The week-long uncertainty about whether the IRS was going to tax state refunds was a disaster. As chair of the Senate’s subcommittee on IRS oversight, I will demand answers for why the IRS explored this radical change, and why this took place in the middle of filing season.”
The IRS issued guidance last week telling Coloradans to delay filing their taxes if they received a special refund last year. About 2.4 million refund checks were sent to Coloradans late last summer to refund taxes collected over the limit set by the Taxpayer Bill of Rights, or TABOR.
TABOR has been part of Colorado’s Constitution for 30 years. While the checks were a new delivery method for the refunds, refunds themselves have been a regular — untaxed by the IRS — occurrence in the state.
“We were as surprised and disappointed as so many Coloradans were of learning of the IRS’s announcement,” U.S. Rep. Joe Neguse, a Lafayette Democrat said in an interview. He organized the bipartisan letter from Colorado delegates sent Friday morning. “For 30 years those payments have rightfully made their way to Colorado taxpayers and their families without the IRS raising any type of issue. That shouldn’t change now.”
Neguse said it was premature to speculate why this round of TABOR refunds were flagged by the IRS or if other state rebates played a role. TABOR refunds are a unique mechanism that Colorado voters implemented and distinct from stimulus payments other states may have issued, he said.
In the letter, Colorado’s federal delegation warned that suddenly taxing the refunds “would impose a significant burden on Colorado taxpayers, introduce considerable compliance costs for taxpayers who did not anticipate having to add their TABOR revenue payments to their joint or single filings, and cost Coloradans hundreds of additional dollars in tax liability.”
Further, they noted concern that the IRS’ announcement during tax season creates “unnecessary stress” for Coloradans.
“As you know, regulatory stability and transparency promote compliance, whereas sudden changes with thin justification do not,” the letter states. “Potential new rules promulgated within months of the filing deadline, with the possibility of costing taxpayers a significant amount of money, would impose unnecessary financial distress on countless Coloradans.”
In addition to Neguse and Bennet, it was signed by U.S. Sen. John Hickenlooper, also a Democrat, and Reps. Lauren Boebert, Ken Buck, Yadira Caraveo, Jason Crow, Diana DeGette, Doug Lamborn, and Brittany Pettersen.
