Colorado Office of the State Auditor 5
Evaluation Results
We found that the deductions are meeting their purpose because eligible taxpayers are
aware of them and claiming them. In order to determine the proportion of eligible taxpayers who
are using these deductions, we examined the Internal Revenue Service’s (IRS) Statistics of Income
for individual taxpayers from Colorado, along with Department data, on the usage of the deductions
for Tax Year 2020. The IRS Statistics of Income report estimates that about 114,000 Colorado
taxpayers received a state income tax refund in Calendar Year 2020 for Tax Year 2019 and included
it in their federal income for Tax Year 2020; these taxpayers should have generally been eligible for
the State Income Tax Refund Deductions. In comparison, Department data showed about 114,000
individual taxpayers claimed the deductions in Tax Year 2020, indicating that nearly all eligible
individual taxpayers are aware of the deduction and using it. Additionally, information on the
deductions is widely available; information on the deductions is clearly provided on the
Department’s tax forms and instructions and by Turbo Tax, a tax return preparation software that is
widely used; and CPAs we spoke with were also aware of it.
We lacked data for estates, trusts, and businesses to complete a similar analysis for those entities. To
assess the awareness and use of these deductions among these entities, we surveyed CPAs from the
Colorado Society of Certified Public Accountants for their feedback on the deductions. We received
8 responses from our survey, 7 of which indicated that CPAs as a whole are aware of these
deductions and apply them to individual, estates/trusts, or corporations. These results are consistent
with the feedback we received in our previous evaluation of the deductions. CPAs noted that
corporations are unlikely to use the deduction as frequently as individuals because they often use
accrual basis accounting and accrue the exact amount of taxes they owe on an ongoing basis. For
corporations that use cash basis accounting, an overpayment and, thus, refund may occur, in which
case CPAs report that these corporations will claim the deduction.
Department data indicate that the deduction had a revenue impact of $4.7 million for individual
taxpayers in Tax Year 2020. Since the line of the tax return forms that estates, trusts, and C-
corporations use to report the deduction is labeled “Other Subtractions” and is used to report
multiple other deductions, it is not possible for us to determine the State Tax Refund Deductions’
revenue impact for those types of taxpayers. The data provided by the Department show the total
amount of all the subtractions taken on that line by estates and trusts totaled $6.9 million, and $44.4
million for corporations. However, based on the feedback we received from CPAs and an
examination of the other deductions that are reported on this line, we believe that the State Tax
Refund Deductions account for a small percentage of the deductions reported.
We also found that changes in federal law decreased the number of individual taxpayers
who claim the State Income Tax Refund Deductions. Department data show that the use of the
deduction by individuals decreased substantially from Tax Year 2018 to 2020, from 424,000
individuals claiming the deduction for a total of $28.2 million in Tax Year 2018 to 114,000