Yes, a copy was sent to the IRS. If you would happen to get a letter asking about the 1099-G, just respond and let them know it was entered with the rental income. This should be no different than a business getting a 1099-Misc, it is expected that the income on that 1099-Misc is already included in the income. If the income is less than the 1099-Misc, then it would raise a flag, if not, then all is well.
If you report it as a taxable grant instead of rental income, your rental income would be lower, which is inaccurate. But, there is no way to directly link the 1099-G to the Schedule -E at this point.
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