Hands off Colorado's TABOR refunds, state's congressional delegation tells IRS

Colorado's congressional delegation on Thursday urged the Internal Revenue Service to stick with longstanding precedent by treating refunds issued under the state's Taxpayer Bill of Rights as nontaxable income.

All but one member of the state's D.C. contingent signed on to a letter led by U.S. Sen. Michael Bennet and U.S. Rep. Joe Neguse, both Democrats, asking IRS Commissioner Daniel Werfel to "resolve the current ambiguity" over TABOR refunds in response to guidance released Wednesday by the agency.

State officials warned the IRS against changing its policy on TABOR refunds following the publication of a notice covering various state income tax refund scenarios, with some emphasizing that it is unclear whether Colorado's unique situation is covered by the proposed rules.

The fresh controversy comes on the heels of a dust-up in February when the IRS initially told Colorado taxpayers to delay filing their 2022 income tax returns until the agency decided whether to tax refunds issued the previous summer by the state. Within days, the IRS announced there would be no change regarding TABOR refunds after the delegation unanimously called on the agency to stick with the policy in place for decades.

Colorado has routinely used a variety of mechanisms to refund excess revenue to taxpayers, as required by the 1992 voter-approved constitutional amendment. Recent forecasts estimate the state could refund more than $3 billion next year.

"The IRS has never treated TABOR refunds as income subject to tax," the lawmakers wrote in Thursday's letter. "The IRS's historical practice makes good sense in lieu of its traditional recognition of states' prerogatives to design and administer tax refunds. The IRS should not change course now."

After urging Werfel, the IRS commissioner, "not to abandon 30 years of precedent," the lawmakers added they "hope you can resolve the current ambiguity so that Colorado's taxpayers do not face further confusion to say nothing of the nightmarish burden of an unprecedented tax."

In addition to Bennet and Neguse, the letter was signed by U.S. Sen. John Hickenlooper and U.S. Reps. Diana DeGette, Doug Lamborn, Ken Buck, Jason Crow, Brittany Pettersen and Yadira Caraveo. U.S. Rep. Lauren Boebert, who signed the delegation's joint letter in February, didn't sign the letter sent Thursday.

On Wednesday, Gov. Jared Polis released a sternly worded statement criticizing the new guidance as "absurd" and calling on the IRS to reverse course.

"Our administration strongly disagrees with the IRS guidance as it fails to factor in that TABOR refunds are returning sales tax dollars in addition to income tax dollars and fees that our citizens have already paid and therefore are an entirely legitimate tax refund and should not be subject to further state or federal taxation," Polis said.

State officials told Colorado Politics that they anticipate clarification from the IRS by early next week.