Two Maine lawmakers who helped negotiate $850 relief checks for Maine taxpayers said Thursday that state officials had assured them that the IRS considered the payments tax free.

But Michael Allen, associate tax commissioner for the Maine Revenue Service, said his office made no such assurances to lawmakers, and never consults the IRS when making policy.

Ben Goodman, a spokesperson for Gov. Janet Mills, downplayed the discrepancy and said the administration “consulted IRS regulations and specifically designed the program consistent with those regulations, which is what we conveyed to lawmakers.”

Allen chalked it up to a miscommunication and said he’s not surprised the IRS is reviewing the payments.

“We were surprised maybe at the timing, but not surprised that the Internal Revenue Service was going to be taking a look at these, particularly since a large number of states in 2022 had similar programs,” Allen said in an interview Thursday.

Now 800,000 Maine taxpayers are waiting to hear from the IRS about whether the relief checks mailed out by the Mills administration last summer will be subject to federal income taxes. About 100,000 state taxpayers already have filed tax returns and may have to file amendments if the agency says the money should be taxed.

The IRS, meanwhile, is advising taxpayers in Maine and 21 other states that made payments to its citizens last year to wait to file returns – if they haven’t already filed – until it rules on the payments’ status.

“For taxpayers uncertain about the taxability of their state payments, the IRS recommends they wait until additional guidance is available or consult with a reputable tax professional,” the agency said. “For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS.”

More information could be available as soon as this week, the IRS said. The payments will remain exempt from state income taxes even if the federal government considers them taxable.

INTENDED TO BE TAX EXEMPT

It’s clear that state officials intended the payments to be exempt from federal taxes.

“The Pandemic Relief Program was designed by the Mills administration with the intention of conforming with the federal tax code … so as not to be subject to federal taxation,” the governor’s office stated in a list of frequently asked questions posted at the time – though it did include a caveat. “Limitations do apply and taxpayers should consult a professional.”

Allen said the state did not issue recipients 1099 tax forms along with the checks because the administration believed the payments were tax exempt. He said the program was designed to meet two specific provisions in the federal tax code – one dealing with means-tested general welfare payments, which the checks were, albeit at relatively high incomes; and the other with disaster payments, which the state believes the checks constituted given the ongoing federal emergency.

Allen said Thursday that state officials long expected the IRS to question whether the payments were taxable, although they thought questions would have come sooner. Maine officials didn’t receive any requests for information from the IRS until Sunday – two days after the agency posted a statement online. The state responded the following day, he said.

Goodman, the governor’s spokesperson, said the state’s interpretation that the payments should not be taxed is consistent with IRS rules.

“The governor hopes the IRS quickly recognizes that Maine’s payments are consistent with their regulations and are thus tax exempt,” he said. “In the event that it does not, the state will consider working with Maine’s congressional delegation to correct any misinterpretation on the part of the IRS. She raised the issue with them during their meeting today.”

Mills was in Washington, D.C., Thursday for the annual winter meeting of the National Governor’s Conference and met with Sens. Susan Collins, a Republican, and Angus King, an independent, and Rep. Chellie Pingree, D-1st District, at the U.S. Capitol to discuss greater collaboration between the federal delegation and state government. Rep. Jared Golden, D-2nd District, did not attend the meeting.

Spokespersons for King and Collins did not answer questions Thursday night about whether the relief payments came up during the meeting or whether the senators would talk to the IRS. Messages left for Pingree’s spokesperson were not returned Thursday night.

GOLDEN PLANS TO CONTACT IRS

Golden issued a statement Thursday night saying he intends to contact the IRS.

“The Maine Legislature and the governor sent those checks to Mainers with the intent of offsetting economic burdens related to the COVID-19 pandemic, and as such the funds should be tax exempt. This is something that I will be contacting the IRS about,” Golden said.

Sen. Jeff Timberlake, the former Senate minority leader who helped negotiate the $850 checks, said state officials told him at the time that the federal government had agreed with the state that the checks were not taxable. The checks were issued last year by the Maine Revenue Service, which is overseen by the Department of Financial and Administrative Affairs, of DAFS.

“What I remember coming back from DAFS was they had checked with the federal government and those checks were supposed to be exempt from income taxes,” Timberlake, R-Turner, said in an interview Thursday. “Whether they actually did or not – I don’t think I saw it in writing.”

Senate President Troy Jackson, D-Allagash, said he received a similar assurance, so he was surprised to learn in media reports this week that the IRS was now questioning the taxability of the payments, especially since he understood that the administration had worked with the agency last year to ensure the payments would qualify as exempt from federal income taxes.

Like the governor’s office, Jackson continues to believe that the checks should be deemed tax exempt.

He said in an interview that he is working on a joint resolution to place before the Legislature as soon as possible to reaffirm that the payments were designed to help with pandemic-related inflation and supply chain issues and should not be taxed, though such a move would be largely symbolic.

“I don’t know how much more clear that you can be than the entire Legislature and the governor of the state of Maine saying these were for pandemic-related issues and please don’t tax them,” Jackson said, adding that the uncertainty is creating anxiety among residents. “I’m pretty hopeful that it’s going to get taken care of quickly.”

It’s not clear precisely how many Maine taxpayers have filed federal returns. But as of Thursday, about 115,900 state tax returns had been filed out of an expected 800,000 returns, the state said.

TurboTax/Intuit, H&R Block and Jackson Hewitt did not respond to emails Thursday seeking information about how the IRS decision might impact their tax preparation programs and what, if anything, consumers who filed or will file their taxes through their software should do now.

Jared Walczak, vice president of state projects for the independent nonprofit Tax Foundation, said the IRS may not be swayed by what the administration says or what language was included in the legislation. He thinks the IRS is more likely to consider these payments taxable.

“I would put the odds on the federal government saying this is taxable, but obviously we don’t know,” Walczak said. “They may try to come up with the most generous interpretation, but the most straight-forward one is that it’s taxable.”

ATTEMPTS TO TIE CHECKS TO PANDEMIC

Maine’s enacting legislation and budget language clearly tie the payments to the pandemic. While the state’s pandemic emergency ended in 2021, the federal emergency remains in effect.

The $850 check initiative was formally called the “COVID Pandemic Relief Payment Program” in the supplemental budget, which says it was designed “to help residents of the state respond to the economic fallout of the COVID-19 pandemic and enable residents of the state to combat rising costs due to pandemic-induced inflation and supply chain effects.”

A letter accompanying the $850 checks said it was designed to help people amid “pandemic induced inflation” and the rising costs of other goods, but it also talked a lot about the state surplus.

“The money comes from the record surplus that state government recorded this year,” the letter signed by Mills said. “My administration and Democrats, Republicans and independents in the Legislature agreed that, in the face of these rising costs, it would be best to send most of that surplus back to you – the people of Maine – and to do it in a way that allows you to use it as you wish.”

In January, the Mills administration and the Legislature created another program to send $450 checks to residents to help offset high energy costs. The administration also said it designed that program to be tax free.

The formal name of $450 check initiative is the “Winter Energy Relief Program,” but additional language also seeks to tie it to the pandemic. It says the fund was designed to help residents afford “high winter energy costs and the effects of the ongoing COVID-19 pandemic.”

Both of the bills were enacted as emergencies and contained preambles referring to the pandemic, pointing to the federal disaster declarations for states, as well as the federal government’s extension of national emergencies relating to the pandemic.

But that may not be enough to convince the IRS.

“Ultimately, the IRS cares about the purpose and function of the rebates and might well conclude that checks written in 2022 were not pandemic relief no matter what state officials called them,” Walczak said. “In most cases, arguably including in Maine, these rebates had more to do with surpluses and inflation than they did with addressing the impacts of the pandemic.”

Walczak said the recent $450 checks appear to be more vulnerable to taxes when Mainers file returns next year.

“The pandemic linkage seems tacked on, and not the main thrust of the rebates, and the IRS might well draw that conclusion,” he said. “While it might hurt a state’s case for officials to come out and call the rebates something other than pandemic relief, applying the label may not help Maine very much.”

Staff Writers Hannah LaClaire and Dennis Hoey contributed to this report.

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