TUCSON, Ariz. (KGUN) — Arizona Attorney General Kris Mayes sued the IRS on Wednesday, February 21st, after the agency maintained the Arizona Family Tax Rebate is subject to federal income taxes. That means qualifying Arizonans have to pay federal taxes on a tax rebate, though Mayes argues that wasn't the case for numerous other states with similar rebates.
The Arizona Family Tax Rebate was a bipartisan state rebate, available to taxpayers who paid Arizona taxes in 2019, 2020, or 2021, and claimed at least one dependent in 2021. That provided $250 for each dependent under 17, and $100 for each dependent 17 or older. The rebate capped out at $750 per taxpayer.
Mayes said the general welfare rebate was designed to help Arizonans in a time of turmoil, as the COVID-19 pandemic began to get under control. She says that falls under an example given in IRS guidelines for what programs are not taxable as federal income, and says the IRS allowed taxpayers in 17 other states with similar programs to deduct the rebate from their federal income.
READ THE FULL COMPLAINT.
But the IRS decided in December of 2023 that the Arizona Family Tax Rebate was subject to federal income taxes. Since then, the Arizona Department of Revenue has included that information on its website.
In February, the Arizona Attorney General's Office reached out to the IRS, asking them to reconsider, but the agency declined.
"The decision by the IRS is arbitrary, capricious, and unfairly targets Arizona taxpayers," Mayes said in a press release.
The Arizona Attorney General's Office tells KGUN9 they would like to get the lawsuit resolved by the tax deadline, but the court will ultimately decide the timeline.
How should you go about filing your taxes, with an ongoing lawsuit?
The Arizona Department of Revenue tells KGUN9 taxpayers should continue with the current guidelines. That is, if you received the Arizona Family Tax Rebate, include it in your federal income report, and deduct it from your state report.
Taxpayers who received the Arizona Families Rebate should follow the current requirements when filing their returns this year. The IRS has advised ADOR that the rebate should be reported as income on federal returns. However, taxpayers can subtract the amount of the rebate they received on their Arizona tax returns.
The Arizona Attorney General's Office also told KGUN9, they are asking the IRS to return any money unlawfully taken, if they win the lawsuit.
