Attorney General Mayes Sues IRS Over Taxation of State-Issued Tax Rebate

Arizona Attorney General Kris Mayes announced on Wednesday the State of Arizona has sued the IRS to prevent it from taxing the state-issued Arizona Families Tax Rebate. The lawsuit filed today in federal district court contends that treating these rebates as taxable income is unlawful and contrary to the IRS’s treatment of similar tax rebates in other states.

“This lawsuit is about standing up for Arizona taxpayers,” said Attorney General Mayes. “The federal government’s decision to tax these rebates is unfair and unlawful – and I will do everything I can to ensure the tax relief provided to Arizonans by their state government remains in the pockets of Arizona taxpayers, as intended. ”

In May 2023, Arizona enacted a General Welfare Income Tax Rebate to offer financial relief to eligible taxpayers. This initiative was based on the understanding from previous IRS guidance that such rebates would not be considered taxable income. However, deviating from its previous stance, the IRS has opted to tax these rebates. The IRS did not confirm its decision in writing until late last week. Prior to filing suit, the Attorney General’s Office attempted in good faith to convince the IRS to reverse its erroneous decision.

The lawsuit specifically alleges the following:

  • Unlawful Taxation: The IRS’s decision to tax the rebates lacks legal basis and contradicts prior IRS guidance and precedents.
  • Arbitrary and Discriminatory: The decision by the IRS is arbitrary, capricious, and unfairly targets Arizona taxpayers.
  • Economic Impact and Violation of Taxpayers’ Rights: Taxing these rebates affects not only the individual taxpayers but also the broader economic well-being of Arizona, reducing the disposable income of taxpayers and state sales tax revenue.