The IRS informed the appeals judge that 750,000 residents of Arizona shouldn’t receive a $20 million class refund related to federal income taxes for state tax refunds in 2023.
In a recent filing with the 9th Circuit Court of Appeals, attorney Anthony Sheehan from the Justice Department argued that Arizona’s payment method is indeed taxable.
He noted that while the IRS has granted tax exemptions to 21 other states, lawmakers in those states had actions already permitted under federal law, which seems a bit inconsistent.
Interestingly, the Arizona law concerning a $260 million giveaway to residents wasn’t aimed at pandemic relief. Instead, he pointed out that it was a method for lawmakers to address a $2.4 billion surplus in the state budget.
The law stated that the rebate’s purpose was related to high inflation, which, as it mentioned, has been around for 40 years, making basic items like gas and groceries tough for many residents to afford.
It added, “Responsible budgeting allowed the state to take action to mitigate the harmful effects of inflation by repaying the surplus to dependents to taxpayers in this state.”
Families in Arizona could receive rebates of up to $250 for children under 17, $100 for older dependents, and up to $750 per family. This helped about 750,000 families, leading to an average rebate of roughly $370.
What lawmakers didn’t fully grasp at the time of approval was that the IRS later viewed Arizona’s payment method to its Department of Revenue as taxable.
Sheehan explained to the court that these payments weren’t based on need; there wasn’t a real connection between the rebate amounts and what residents had paid in state taxes, which seems, well, a bit unfair.
He pointed out that the eligibility criteria for these payments inadvertently excluded the poorest residents, allowing higher-income individuals to benefit instead.
Essentially, the payouts were tied to who qualified under federal tax standards.
Thus far, things seem to be leaning in favor of the IRS.
Last year, the judge dismissed the lawsuit initiated by Attorney General Chris Mays, who aimed to secure tax payments. Now, the matter is with a federal appeals judge.
Even if Mays were to win the case, it’s unclear whether affected taxpayers should anticipate checks arriving in the mail.
Sheehan posited that even if Arizona pays $20 million on a $260 million rebate, it shouldn’t be collected by the IRS, a stance he stands firm on.
Moreover, states have acknowledged that residents may need to file appeals themselves.
Sheehan also mentioned that the Arizona rebate faces taxation because 21 other states enacted similar programs in 2022 that were connected to COVID emergencies.
However, he argued that Arizona didn’t adopt its “Arizona Family Tax Refunds” until May 11, 2023, and payments were subsequently made after the emergency had concluded.
In essence, he remarked that lawmakers took too long to act.
The appeal judges seem open to further discussion, with a hearing set for November.
