Only six months ago, Coloradans breathed a sigh of relief when the Internal Revenue Service announced it would not take out federal taxes on refunds from Colorado’s Taxpayer’s Bill of Rights.

But now Colorado officials worry that taxability of the refunds is once again being called into question under new guidance released by the IRS on Wednesday, which could potentially reverse its decision. 

The new guidance says people who claim the standard deduction on their federal income tax returns – around 90% of taxpayers – do not have to include state tax refunds in their taxable income. Those who itemize their deductions must include the refunds, but only if they deducted all of the state taxes they paid.

Colorado tax officials are unsure whether the state would fall into these new guidelines, or be carved out so that all Coloradans will have to pay federal taxes on their TABOR refunds. 

“TABOR refunds essentially are refunds of sales tax, and so, it looks like they might have a slightly different interpretation just for Colorado. We aren’t sure yet,” said Daniel Carr, spokesman of the Colorado Department of Revenue. “I think the IRS is looking at it as almost a unique type of refund. But we’re still trying to figure out exactly how they’re going to treat us.” 

Carr said state tax officials are reaching out to the IRS to clarify what impact the new guidance would have on Colorado taxpayers. 

“We know it’s going to have an impact,” Carr said. “Best case scenario, most people don’t have to worry about this. Worst case scenario, you claim it as additional income. … But, hopefully, that’s not the case.” 

In the 30 years since Colorado has provided some form of TABOR refunds to residents, the refunds have never been federally taxed. 

Earlier this year, the IRS considered taxing the expedited TABOR refunds provided to Colorado citizens as economic stimulus checks of $750 for individuals and $1,500 for joint filers. If taxed, it would have reduced the refunds by around $100 per person, the governor’s office said at the time.

Ultimately, the IRS decided in February that it would not subject state stimulus checks to federal income tax – a move pushed for by every member of the state’s congressional delegation and Gov. Jared Polis.

Polis released a statement on Wednesday calling the IRS’s new guidance “absurd” and requesting that President Joe Biden’s administration reverse the decision. 

“The IRS is proposing going back on 30 years of not treating TABOR refunds as taxable income,” Polis said. “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.”

Colorado’s U.S. senators, both Democrats, also sounded the alarm.

“For 30 years, the IRS has not taxed TABOR refunds – and it makes no sense for them to start now,” U.S. Sen. Michael Bennet said in a statement. “I’m committed to working with the IRS to ensure TABOR’s precedent is respected and that Coloradans can keep the money they are entitled to.”

Said U.S. Sen. John Hickenlooper: “TABOR is a refund of Coloradans’ hard earned tax dollars, not new income. The IRS has agreed for 30 years. We’re not going to let that change now.”

Outside of potential presidential intervention, Carr said state tax officials are also trying to determine if the IRS’s new guidance can be amended. 

Though it’s too early to know exactly how the guidance will impact Coloradans, Carr said it would not effect anybody retroactively. That means it would apply beginning with 2024 tax filings for TABOR refunds issued in 2023. 

“We have a little bit of time to figure this out before people file their taxes in 2024,” Carr said. 

The IRS is accepting comments on its new guidance from states and members of the public through Oct. 16.

– Colorado Politics reporter Ernest Luning contributed to this story.