Arizona Attorney General Kris Mayes is taking legal action to prevent the Internal Revenue Service (IRS) from taxing last year’s family rebates. In response to the IRS’s decision to tax these rebates, Mayes has filed legal papers urging a federal magistrate to intervene.

The rebates, totaling up to $750 for eligible families, were distributed as part of a budget provision adopted by Arizona lawmakers. However, despite similarities with rebate programs in 17 other states, the IRS has determined that Arizona’s rebates are subject to federal income tax.

Mayes argues that Arizona had a reasonable expectation that the rebates would not be taxed federally, especially considering previous IRS rulings on similar rebate programs. Clinten Garrett, an assistant attorney general, emphasized that the money was intended to benefit Arizona taxpayers directly, not to be claimed by the federal government.

The urgency of the situation is compounded by the approaching tax filing deadline of April 15. The Arizona Department of Revenue has already issued 1099-MISC forms to rebate recipients, potentially putting taxpayers in a precarious position of either facing IRS penalties for not reporting the rebate or having to file amended returns later.

Richie Taylor, a spokesperson for the Attorney General’s office, highlighted efforts to secure a preliminary injunction barring the IRS from collecting taxes on the rebates or penalizing taxpayers who exclude the rebate from their federal returns.

The legal dispute revolves around the nature of the payments, with Arizona arguing that they were not compensation for services and thus should not be taxable. The state emphasizes that the rebates were a response to economic challenges faced by Arizonans, made possible by responsible budgeting.

If the IRS’s taxation of the rebates proceeds, it could cost affected Arizonans an estimated $20.8 million collectively. The potential tax liability varies depending on individuals’ income levels and tax brackets.

No hearing date has been set for the case, but Mayes’s actions reflect a significant effort to protect Arizona taxpayers from unexpected federal tax burdens on state-provided rebates.