Arizona Demands $20 Million Refund from IRS in Bold Move

Arizona has initiated a lawsuit aiming to reclaim $20 million allegedly wrongfully taken from its taxpayers by the IRS.

State lawyers argue that the IRS improperly deemed the one-time rebate checks from 2023 to be federally taxable.

In a parallel case, 21 other states that implemented similar rebate programs were not subjected to federal taxation.

The lawsuit, filed by the Attorney General’s Office, contends that U.S. District Court Judge Murray Snow made an error when he upheld the IRS’s decision regarding the taxation of $260 million distributed as rebates to residents.

Judge Snow acknowledged that while the IRS reversed its stance concerning rebates in other states, he distinguished Arizona’s situation, noting that in some cases, rebates exceeded the amount of state taxes paid by residents.

He further asserted that only individuals specifically harmed by the IRS’s decision could sue, a stance undermined by the lack of named plaintiffs.

Assistant Attorney General Josh Bendor is advocating for the state’s standing in the case as it appeals to the 9th Circuit Court.

Bendor highlights that the IRS collected around $20.8 million from Arizona residents, suggesting that the state could have generated approximately $480,000 in sales tax from those funds.

Judge Snow characterized the state’s claim of injury as “derivative and speculative,” emphasizing that no definitive harm was proven.

Conversely, Bendor argues that the state deserves the chance to present its case, criticizing Snow for dismissing it without hearing evidence.

The issue traces back to a provision in the 2023 budget, which, amid a budget surplus, allocated rebates of $250 per child under 17 and $100 for older dependents, capping at $750 per household.

This resulted in approximately $260 million distributed to 750,000 families, averaging about $370 in rebates.

Unbeknownst to state officials at the time, the IRS later clarified that it considered these payments subject to federal income tax.

Consequently, the state had to issue 1099-MISC forms to rebate recipients, making taxpayers liable to report and pay taxes on them.

Bendor argues that this treatment discriminates against Arizona’s taxpayers compared to their counterparts in other states who retained their full rebates.

He made the case that the IRS’s decision lacked a rational basis, claiming it violated the Administrative Procedures Act by denying Arizona equal treatment under the U.S. Constitution.

Bendor also countered Snow’s notion that the state’s sales tax loss was speculative, citing input from an Arizona Department of Revenue economist to bolster his argument.

Even if the 9th Circuit agrees with Bendor, it cannot directly mandate the IRS to refund the money; it can only instruct Snow to reconsider the case.

Should the state prevail, however, it’s uncertain if individual taxpayers will directly receive checks.

Richie Taylor, a spokesman for the Attorney General’s Office, stated a preference for direct relief, but noted potential complications in identifying individual taxpayers affected.

This scenario could necessitate Arizonans to file amended tax returns for the year 2023.

Interestingly, while the state cited its claimed $480,000 loss as grounds for the lawsuit, it is not directly demanding the money from the federal government.

Taylor noted the belief that if Arizona wins and taxpayers are reimbursed, increased spending would eventually bring sales tax revenues back to the state treasury.