Dec 16, 2010

Tax stimulus creates problems for 13.4 million Americans

13.4 million Americans were or will be negatively affected by the Making Work Pay Credit in 2009 and 2010

On December 16th, 2010, the Treasury Inspector General for Tax Administration ("TIGTA"), the IRS' internal watchdog, released a report about the negative affects of the Making Work Pay Credit for 2009 and 2010. The Making Work Pay Credit is a 2009 stimulus provision that would allow up to an $800 credit for working couples ($400 for single taxpayers and $250 for certain retirees) on their 2009 and 2010 tax returns. In order to get these funds out in the economy quickly, the IRS adjusted its withholding tables to allow for less taxes to be withheld on each paycheck.

According to the Report, the withholding snafu is causing April 15th tax bills. It also added additional penalties for 1.1 million Americans taxpayers. The most likely people are likely to have these circumstances:

  • dependents who receive wages (they were not allowed the credit)
  • single taxpayers with more than one job (they got double benefits)
  • joint filers when one or both spouses have more than one job or both spouses work (they got double or triple benefits)
  • individuals who file a return with an individual taxpayer identification number (called an "ITIN" - the credit is only available to those with a valid SSN. The tables used to calculate withholding were used for all taxpayers. The IRS had special rules for those with ITINs but employers most likely used the tables instead.)
  • taxpayers who receive pension payments (private pensioners are not eligible for the credit unless they also work)
  • social security recipients who receive wages (these got double benefits)

TIGTA warned the IRS in November, 2009, of the potential problems associated with administering the credit. They forecasted many would be adversely affected and it turns out that they were right.

TIGTA asked the IRS to identify those taxpayers who owed a penalty as a result of the credit and abate their penalties. The IRS declined to take any corrective action by refusing to contact taxpayers affected.

Penalties are assessed by the IRS to foster compliance. They are not intended to be revenue raisers. Taxpayers clearly did not intend to not pay their taxes and should not be penalized.

As my grandfather used to say, this is "dirty pool" and leaves a bad taste in the American taxpayer. Does anyone in Congress want to step up to bat for the American taxpayer?

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