Final word: (Most) state payments not taxable

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Feb 13, 2023 View in browser   By Bernie Becker Presented by CAN YOU SAY FRIDAY NEWS DUMP? The IRS made it official on Friday evening — it won’t be taxing most direct payments that states sent out during 2022. That decision basically ends a week of controversy and criticism for the tax collector that kind of came out of nowhere — and, according to lots of tax professionals, largely was a problem of the agency’s own making. It seems clear that the IRS had real questions about whether it should have been collecting taxes on those rebates — otherwise, it wouldn’t have still been considering the matter several weeks into the tax filing season. And in some cases in some states, where the direct payments were classified as tax refunds, the IRS says some taxpayers would have tax obligations. But for the most part, the agency is calling most of the payments sent last year as either for disaster relief or general welfare, meaning recipients won’t owe any federal taxes on them. What else could they do? On a practical level, it likely would have been hard for the IRS to suddenly rule that those payments were taxable, even if agency officials truly believed they should be. For starters, Democratic lawmakers were increasingly putting pressure on the service to make it clear once and for all that it wouldn’t be taxing those payments. Sen. Michael Bennet (D-Colo.) joined the fray on Friday, urging the IRS not to tax payments sent out of Denver (and then releasing a statement in the evening praising the service for “heeding our call.”). The top Democrat on the House Ways and Means Committee, Rep. Richard Neal of Massachusetts, similarly said on Sunday that he was glad that the IRS relieved the “confusion or uncertainty” surrounding the payments. And it was the Democratic senators from California, Dianne Feinstein and Alex Padilla , who kicked off the pressure campaign last week — perhaps no surprise there, given the state had handed out some $9 billion in direct payments in 2022. (Feinstein then followed up with another statement Sunday, also praising the IRS for coming to the right decision.) MORE ON ALL THIS IN A BIT, but first, thanks for believing in us enough to come back for more Weekly Tax. Happy birthday to the original Baby Tax, who is now 8 — which is halfway to 16, which is already sounding very stressful. It does have quite a ring to it: Today marks 334 years since William III and Mary II were declared the joint sovereigns of Britain. Have a golden tip? Don't make us green with envy — send it our way. Email: bbecker@politico.com, bfaler@politico.com, bguggenheim@politico.com and teckert@politico.com. You can also reach us on Twitter at @berniebecker3, @tobyeckert, @brian_faler, @ben_guggenheim, @POLITICOPro and @Morning_Tax. A message from Intuit, serving more than 100 million customers worldwide with TurboTax, QuickBooks, Credit Karma, and Mailchimp: Intuit TurboTax Live Tax Experts are personal advocates for taxpayers. They're the skilled tax professionals next-door, all here to give every taxpayer personal and professional service with every call and question. Located all across the country, our proven tax experts help Americans better understand their unique tax situations and make sure returns are done right. Find out how we help fuel America with confident filings here.   THE PAYMENT PLAN: Which isn’t to say that the IRS merely buckled to political pressure here, or even that politics was even the major factor. That’s because it would have also been a pretty big logistical challenge to deem those state payments taxable almost three weeks after the tax filing season started. The big tax prep companies like TurboTax and H&R Block basically brushed aside the request from the IRS early this month to stop processing tax returns filed with those direct state payments, arguing that it was pretty clear to them that those rebates weren’t taxable. To be fair, the national taxpayer advocate said she could understand where the companies were coming from. In any event, it likely would have been quite the task for the IRS to try to put the toothpaste back in the tube for all the returns that had been treating those payments as nontaxable. Some hiccups to come: It sounds like taxpayers at least in California could have some further trouble with their state payments — as CNBC reported, the state had already issued federal tax forms that say the payments were taxable. THE BROADER VIEW: The state payment issue isn’t really all that related to the $80 billion in new funding for the IRS that Democrats enacted last year. But it does help underscore just how under the microscope the IRS is after getting all that money. Along those lines: A Treasury official announced Friday that the IRS answered almost 89 percent of phone calls during the first almost two weeks of the filing season. Add in automated options and chat support, and that figure went up to over 93 percent, the official added. If it seems proactive for Treasury to be announcing customer service figures so soon during the filing season — keep in mind that Treasury Secretary Janet Yellen vowed after the Inflation Reduction Act was passed last year that the IRS would be able to answer the phone 85 percent of the time this year. In fact, the Biden administration has been plugging for months that the new funding would allow the IRS to hire an extra 5,000 customer service representatives for this filing season — and thus greatly increase the agency’s ability to answer the phone, after it reached record-bottom levels the last couple years. Looking ahead: The Senate Finance Committee will hold a confirmation hearing on Wednesday for Danny Werfel, President Joe Biden’s choice to be next IRS commissioner. Werfel spent six months as interim IRS chief back when the agency was immersed in its tea party controversy — and unless something emerges that we haven’t seen yet, he seems likely to be confirmed by a Senate controlled by Democrats. Republicans likely will have questions about Werfel’s previous tenure at the IRS, which left some — but not all — in the GOP decidedly unimpressed. But it’s fair to expect that Democrats and Republicans alike will use the hearing to press their case on the $80 billion in funding. GOP senators, who have argued that the new money is too focused on enforcement and not enough on customer service, will be able to press Werfel about how that new funding will be implemented. For their part, Democrats will have a chance to further make the public case for the funding, which has come under consistent attack from Republicans. Early endorsement: The National Association of Enrolled Agents backed Werfel for confirmation on Friday, suggesting that he had the experience needed to successfully implement all that IRA money. “As federally authorized tax practitioners, EAs have struggled to represent taxpayers before an over-committed and under-resourced agency. The $80 billion authorized for the agency through the Inflation Reduction Act provides a once in a generation opportunity to build a taxpayer-centric organization,” the group’s Megan Killian wrote to Senate Finance Chair Ron Wyden (D-Ore.) and Sen. Mike Crapo of Idaho, the panel’s top Republican. ANOTHER TOPIC ENTIRELY: The Treasury Department isn’t alone in trying to get a better idea of how much extra benefits the tax code might give to white taxpayers. The Urban-Brookings Tax Policy Center announced this morning that it had tweaked its tax model to better account for how tax changes are distributed on racial and ethnic lines. Like a recent Treasury study, the Tax Policy Center found that white taxpayers overwhelmingly benefit from the credits and deductions used by people who itemize their returns. “Overall, itemized deductions boost the after-tax incomes of units classified as White by 0.7 percent, whereas those classified as Black gain an average of 0.4 percent, and those classified as Hispanic an average of 0.2 percent,” the group wrote in a new report.   We’re spilling the tea (and drinking tons of it in our newsroom) in U.K. politics with our latest newsletter, London Playbook PM. Get to know all the movers and shakers in Westminster and never miss a beat of British politics with a free subscription. Don’t miss out, we’ve got some exciting moves coming. Sign up today.     Want to receive this newsletter every weekday? Subscribe to POLITICO Pro. You’ll also receive daily policy news and other intelligence you need to act on the day’s biggest stories. Around the World Bloomberg Tax: “US-Chilean Tax Treaty Ensnarled Amid GOP, Treasury Tiff.” Cointelegraph: “Brazil’s oldest bank allows residents to pay their taxes using crypto.” BBC: “Net zero targets 'may mean higher taxes.’”     Around the Nation Bloomberg: “Ford Plans to Build EV Battery Plant in Michigan With Chinese Partner.” Salt Lake Tribune: “Lawmakers eye plan to end food sales tax — but only if voters remove constitutional earmark for education.” Honolulu Civil Beat: “Is Hawaii Ready For The Governor’s Tax Cut Plan? Lawmakers Aren’t So Sure.” Also Worth Your Time Wall Street Journal: “These Millionaires Tried Turning a Yacht Into a Tax Break. The IRS Sank Their Plan.” New York Times: “DeSantis Declares Victory as Disney Is Stripped of Some 56-Year-Old Perks.” Roll Call: “Ideological, regional diversity hallmarks of tax panel’s frosh.”   DOWNLOAD THE POLITICO MOBILE APP: Stay up to speed with the newly updated POLITICO mobile app, featuring timely political news, insights and analysis from the best journalists in the business. The sleek and navigable design offers a convenient way to access POLITICO's scoops and groundbreaking reporting. Don’t miss out on the app you can rely on for the news you need, reimagined. DOWNLOAD FOR iOS– DOWNLOAD FOR ANDROID.     Did you know? “William and Mary,” an English television series from early this century, focuses on the relationship between an undertaker and a midwife. A message from Intuit, serving more than 100 million customers worldwide with TurboTax, QuickBooks, Credit Karma, and Mailchimp: Our TurboTax Live Tax Experts are the skilled tax professionals next-door—nice enough to let a neighbor borrow some sugar, and experienced enough to make sure they've maximized every credit and deduction on your tax return. They're personal advocates for taxpayers who understand that, for some, the tax season is stressful, unpredictable, and confusing—and they're here to help make it less so. Located all across the country, these proven experts have helped families and small business owners better understand their unique tax situations so they can maximize their tax returns. But beyond industry expertise, TurboTax Live Tax Experts are real people who help their fellow Americans file accurately and can even provide advice for the next year. The US Tax Code is complex. Finding the help to navigate it shouldn't be. 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