Warning as 750,000 Families Could Be Taxed on Tax Rebate

By Aliss Higham

The Internal Revenue Service (IRS) has said it is permitted to tax a one-off tax rebate issued in Arizona last year despite retaliation from the state.

Earlier this year, the Department of Revenue (ADOR) announced that those who had received Arizona Families Tax Rebate will need to report it on their tax returns as it is subject to federal income tax. But despite being challenged by local lawmakers, lawyers for the IRS have doubled down and insisted the rebate can have income taxes levied on it.

According to a report by Arizona news site Your Valley, the IRS has said that the payments clearly qualify as income according to federal law, and therefore must be reported and taxes paid before the tax season deadline on April 15. Newsweek has contacted the IRS for comment and clarification via email.

The rebate paid out $250 per dependent under 17 years old, with a cap of $750 dollars for eligible families. According to Arizona's attorney general Kris Mayes, around 750,000 families in Arizona were eligible for the rebate.

To qualify, according to ADOR, taxpayers must have claimed the state's dependent tax credit on their 2021 full-year Arizona income tax return and had at least $1 of Arizona individual income tax on their 2021, 2020 or 2019 returns.

The IRS court filing comes after Mayes sued the IRS following its informing of ADOR that the rebate did not qualify for exemption as similar rebates do in some other states.

"The IRS's unlawful determination is so arbitrary, capricious, and inequitable as to constitute an unlawful targeting of Arizona and its taxpayers in a manner that deprives Arizona of its right to make informed budgetary decisions in the best interests of the State and its taxpayers," read a complaint made by Mayes, who has consistently said the rebate should not be subject to federal taxes.

According to a report by Thomson Reuters, Mayes said: "This lawsuit is about standing up for Arizona taxpayers. "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."

Republican state Senate President Warren Petersen has also previously disagreed with the IRS decision, which was initially made in January this year. In a letter to IRS commissioner Danny Werfel, Petersen said, "It makes zero sense that the IRS is choosing to hurt Arizona families by taxing a tax rebate," he said in a press release issued on January 19.

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A spokesperson for ADOR previously told Newsweek that the decision to make the refund taxable was at the behest of the IRS. They said: "The determination was not made by the Arizona Department of Revenue. The rebate remains exempt from Arizona state tax.

"Arizona is required by the IRS to provide a 1099-MISC form to those taxpayers who received the rebate, as documentation to claim the income on their federal tax return."