The IRS ruled Friday that state stimulus payments, like the $850 pandemic relief checks Maine sent to tens of thousands of households, are not subject to federal taxes.

The tax agency made the announcement after putting millions of taxpayers in Maine and 16 other states on pins and needles at the outset of the tax filing season. The payments, from a state budget surplus, were intended to help Mainers deal with high inflation and the lingering economic impacts of the COVID pandemic and are not subject to state income taxes, Maine officials said.

The same officials said they assumed that the payments would not be subject to federal income taxes, just like federal stimulus checks issued in 2021. But they never asked the IRS, which said earlier this week that it hadn’t made a determination on whether state stimulus payments would be taxable. In the meantime, the agency suggested that taxpayers hold off on filing their 1040s until a decision was made.

Friday, the agency said that as general welfare or disaster relief payments, the stimulus payments are not subject to federal income taxes.

In a statement Friday night, Gov. Janet Mills said she welcomed the decision and “the IRS’s recognition that the relief payments are consistent with the federal tax code and not subject to federal taxation, as the administration and Legislature designed them to be.”

A Saco certified public accountant believes the IRS made the call that the payments were not taxable to avoid a public relations disaster.

“The IRS got a lot of bad press” last year when it initially ruled that federal stimulus payments would be subject to federal income taxes, CPA Bob Begin said. The tax agency was forced to reverse course when Congress amended the stimulus payment bill to make it clear recipients wouldn’t owe taxes on the payments.

“They just didn’t need another hit,” by ruling the state payments were taxable, Begin said of the IRS.

The amount the tax collectors would have taken in by taxing the stimulus payments in Maine and 16 other states “is peanuts,” he said, probably amounting to no more than $120 for taxpayers making about $50,000 a year. “I think they just didn’t want the bad press.”

Begin expects that on Monday he’ll see a rush of clients who are eager to finish filing their taxes now that the ruling has come down and it means they will be able to keep all of the $850 they received. All Mainers who filed state tax returns, except individuals earning more than $100,000 and couples earning more than $200,000, were eligible to receive the checks.

Begin said the decision didn’t surprise him, but the speed at which the agency moved did. He had expected the agency to take weeks to decide on the taxation issue, not days.

“I’ve been dealing with the IRS for 45 years and that’s the first time I saw them act quickly,” he said.

Friday’s announcement by the IRS dealt only with the $850 stimulus checks and not the $450 winter energy relief checks that the state has begun to mail to Maine households.

Clients had been prodding Begin for information on the IRS decision since the agency announced it was looking at whether the stimulus payments were taxable, especially those who had to delay their tax filing.

“The first person who walked through the door today said, ‘What about the $850?'” he said.

Begin had been advising his clients to choose their fate and either pay taxes on the stimulus checks, and risk overpaying the government, or to skip a payment and risk the IRS sending a bill for the taxes, plus interest.

The uncertainty strained Maine’s already overburdened and understaffed tax professionals, just as their busy season was starting to pick up steam.

“Right now, they’re running on fumes,” Patricia Brigham, executive director of the Maine Society of CPAs, said on Friday before the IRS’ announcement.

Tax professionals are usually working at full tilt between January and April, she said, and since the pandemic, there hasn’t been much downtime. Early on, there were PPP loans to deal with, extended tax deadlines and stimulus payments. It was difficult for the industry to catch its breath. Plus, Maine and other states are contending with a massive shortfall of tax professionals. According to the Wall Street Journal, roughly 300,000 accountants and auditors have left their jobs in the last two years.

“So to have to go back and redo a tax return is just duplicate effort,” Brigham said. “Anything that adds extra work is actually a stressor to the system.”

‘YOU CAN’T SIT AROUND AND WAIT’

A positive sign for CPAs: According to Brigham, many people who might need to file an amended tax return likely did their taxes through an online service such as TurboTax, H&R Block or Jackson Hewitt. People in the tax bracket receiving the $850 payments are less likely to use a CPA, she said. And if, by the second week of February, they’ve already completed their returns, they’re likely not complicated ones.

Online tax service providers had not been forthcoming about how the uncertain tax liability affected their customer base. TurboTax/Intuit and H&R Block did not respond to multiple inquiries Thursday and Friday seeking information about how the IRS decision might alter their tax preparation programs – and what, if anything, users should do.

Like Begin, Peter Dufour, a CPA and founder of Dufour Tax Group in Portland, thought that the IRS decision was fraught with public relations implications.

“I think it wouldn’t work in their favor if they made them taxable,” he said of the IRS. “It’s at odds with the purpose of the payments. The IRS has been under fire quite a bit in the last couple of years because of their struggles. … I think they need to consider the political implications of their decision.”

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