Democrat Pressures IRS to Change Tax Ruling After Missing Deadline

Minnesota Democrat Governor Tim Walz is putting pressure on the Internal Revenue Service to forego federal taxes on state rebates in the few weeks before tax season, and an expert told Newsweek what that could mean for other states.

The state has been pushing the IRS to remove the federal tax penalties on the rebates for months, but Minnesota only has a few weeks remaining before the 2023 tax season begins January 29.

Walz and Republican U.S. Rep. Pete Stauber both had conversations with IRS Commissioner Danny Werfel about taking away the federal tax rules for the one-time rebate, but it’s still unknown whether any decision will go through.

The IRS initially announced it would be taxing the rebate in the fall, meaning Minnesota taxpayers would need to give back anywhere from $26 to $286 depending on how much they earned in the payout. Payments ranged from $260 to $1,300 based on your income and tax information.

The IRS said while other states’ rebate programs could be labeled pandemic-era relief, and therefore not subject to federal taxes, Minnesota’s rebate came too late to bypass the typical rules by just 12 days.

Walz said the decision was “disappointing” when it was announced.

“Since 2022, (the) Minnesota Legislature and Walz Administration have discussed relief payments to Minnesotans for the impact of inflation and lingering effects of the pandemic,” Minnesota Tax Committee Chairs Aisha Gomez and Ann Rest wrote in a letter to the IRS this month. “We believe taxing these relief payments would put Minnesotans at an unfair disadvantage compared to similarly situated residents of other states covered by the guidance who are able to exclude ‘spillover’ state payments made in 2023.”

In 2022, 21 other states passed similar rebates that were ruled exempt from federal taxes. And some states have also been granted an exception even if their rebates came a bit after the deadline.

Walz previously told MPR News that after a year of campaigning to pass the rebates, the IRS didn’t think there was an explicit link in the checks to pandemic relief.

“The IRS is saying, ‘Well, you didn’t explicitly say that your tax rebate checks in the bill were for the pandemic.’ No, I said it 100 times starting in 2022 that that’s what it was for. So I’m very frustrated with them,” Walz said previously. “I think they’re doing letter of the law, rather than spirit of the law. So I’m not super hopeful.”

Markus Kraus, a finance expert and the owner of Trading Verstehen, said if Minnesota and the IRS are able to come to a resolution though, it could set a lasting standard for other states when they fight these battles.

“The likelihood of success for this initiative hinges on negotiations and policy alignments at the federal level,” Kraus told Newsweek. “If successful, it would set a precedent for how state-issued rebates are treated under federal tax law, possibly influencing future relief measures across other states.”

The IRS might be hesitant to include Minnesota in its exempted rebate list due to the long-term revenue fallbacks. But for Minnesota taxpayers, the federal tax could make a hundreds of dollars difference.

“The advantage is clear,” Kraus said. “More money stays in the pockets of the recipients, increasing the intended financial support.”

Revenue Commissioner also told MPR News that they had used similar parameters from other states’ rebates to design the Minnesota relief.

“We used the parameters and the facts that we kind of had before us to design this one-time rebate,” Marquart said last month. “And we thought we had matched up very well with those states that had been found not taxable. But ultimately, it’s the IRS who makes that determination.”

Because the IRS will be counting the rebates as taxable income, all rebate recipients will get a 1099 tax form. They’ll also have to claim the full rebate as income when filing their federal 2023 returns.

In 2022, when Minnesota passed a frontline worker rebate, the IRS similarly said it did not pass the test and would still be considered taxable income.