A sign hangs outside the Internal Revenue Service building in Washington, on May 4, 2021. Credit: Patrick Semansky / AP

AUGUSTA, Maine — The Internal Revenue Service said Maine’s last round of $850 relief checks will not be subject to federal income taxes, lifting a weeklong cloud of uncertainty over state returns.

Maine was one of 21 states contending with a part of the federal tax code. While it exempts direct payments to Americans in disasters, it was unclear whether relief programs in 2022 qualified because they were often branded as responses to inflation or record surpluses.

A week ago, the IRS said it was working to determine whether the payments were taxable. On Friday, it provided clarity, saying giveback programs in Maine and 16 other states can be left out of tax returns. Some refunds remain taxable in Massachusetts and three other states because they were processed as tax returns.

“The IRS appreciates the patience of taxpayers, tax professionals, software companies and state tax administrators as the IRS and Treasury worked to resolve this unique and complex situation,” the agency said in a statement.

The administration of Gov. Janet Mills, a Democrat, had expressed confidence that the payments will not be taxed, though tax experts disagreed on how Maine would fare when it came to the program that sent checks to roughly 880,000 residents last year.

The law establishing it billed the checks as a disaster relief program. Mills, who was in the homestretch of her reelection campaign, enclosed a letter with the checks calling them a response to household budgets “stretched to the brink by pandemic-driven inflation and the rising costs of everyday goods” and notes funding from a “record surplus.”

Payments in states, including Maine, arguably had more to do with inflation than COVID-19 effects, Jared Walczak, the vice president of state projects for the Tax Foundation, said. But Sharon Huntley, a spokesperson for the governor’s budget office, noted that the letter tied Maine’s checks to the pandemic and that the program was designed to be federally exempt.

“The IRS has indicated that it is in the process of reaching its own determination, and we believe that the agency should conclude too that the payments are exempt,” Huntley said earlier on Friday.

The Portland Press Herald reported Thursday that the Mills administration did not consult the IRS when designing the program, with the state responding by downplaying the importance of that. Huntley said the IRS asked the state for details on the program Sunday.

Maine’s uncertainty with the IRS threatened to upend tax season for many residents, including lower-income people who filed earliest to nab quick returns. As of Thursday, nearly 116,000 Mainers had filed state returns, equaling about 14 percent of all those expected to file.

Last week, the IRS advised those in affected states, including Maine, to not file federal returns until final guidelines came down. Its handling of the issue during tax season was criticized by National Taxpayer Advocate Erin Collins, the agency’s official watchdog.

“The IRS has known for months that there is uncertainty about the tax treatment of these special state tax refunds or payments, and it has also known the answers may affect tens of millions of taxpayers,” she wrote.

Michael Shepherd

Michael Shepherd joined the Bangor Daily News in 2015 after three years as a reporter at the Kennebec Journal. A Hallowell native who now lives in Augusta, he graduated from the University of Maine in...