Arizona Sues IRS Over ‘Unlawful’ Decision to Tax Rebates

Arizona is suing the IRS after the agency imposed federal income taxes on the state’s Family Tax Rebate, Attorney General Kris Mayes announced on Feb. 21.

In a statement on Feb. 21, Ms. Mayes said the lawsuit—filed in federal district court on the same day—argues that taxing the rebates is “unlawful and contrary” to the IRS’s treatment of similar tax rebates in dozens of other states.

“This lawsuit is about standing up for Arizona taxpayers,” she said. “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.”

The lawsuit comes after the IRS decided in December to tax the state’s rebate, which was initially part of a relief plan enacted in Arizona in 2023 by Gov. Katie Hobbs, a Democrat.

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