Prepare To Pay Back Tax Credit and Be Penalized

Zero Hedge has an article ("Prepare To Pay Back The Tax Credit", Tyler Durden, 11/16/09) that has a link to the report dated November 4, 2009 by the Treasury Inspector General for Tax Administration (TIGTA).

I took a quick peek at the report titled Millions of Taxpayers May Be Negatively Affected by the Reduced Withholding Associated With the Making Work Pay Credit, and here's what I found [emphasis is mine]:

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WHY TIGTA DID THE AUDIT

The Making Work Pay Credit, a provision of the American Recovery and Reinvestment Act of 2009, will apply to most taxpayers with earned income. The credit will be in effect for Tax Years 2009 and 2010. The Making Work Pay Credit was implemented using new income tax withholding tables issued by the Internal Revenue Service (IRS). Application of the tables could negatively affect a significant number of taxpayers. The overall objective of this review was to assess IRS efforts to implement the Making Work Pay Credit and to evaluate its impact on taxpayers.

IMPACT ON TAXPAYERS

The Making Work Pay Credit is to be advanced to taxpayers through their wages by a decrease in Federal income tax withholding. This creates the vulnerability that some taxpayers may have their taxes underwithheld at the end of Tax Years 2009 and 2010. If taxpayers are advanced more of the Making Work Pay Credit than they are entitled to, they may ultimately owe taxes when filing their Tax Years 2009 and 2010 tax returns and may be assessed estimated tax penalties.

WHAT TIGTA FOUND

Based on an analysis of Tax Year 2007 tax return data, TIGTA estimates that more than
15.4 million taxpayers could unexpectedly owe taxes for Tax Year 2009 as a result of the Making Work Pay Credit.

TIGTA’s analysis of the new withholding tables and the amount of the credit that taxpayers are to receive identified taxpayers who would be advanced more of the credit than they were entitled to receive. The changes to the withholding tables do not take the following situations into consideration:

• Dependents who receive wages.
• Single taxpayers with more than one job.
• Joint filers where one or both spouses have more than one job or both spouses work.
• Individuals who file a return with an Individual Taxpayer Identification Number.
• Taxpayers who receive pension payments.
• Social Security recipients who receive wages.

More than 1.2 million taxpayers included in these groups may be subject to: 1) paying back some or all of the Making Work Pay Credit and 2) being assessed the estimated tax penalty or an increased estimated tax penalty as a direct result of the Making Work Pay Credit.

RECOMMENDATIONS AND IRS RESPONSE

TIGTA recommended that the Commissioner, Wage and Investment Division: 1) increase media coverage and consider other forms of advertisement in addition to the mediums already being used and, to the extent possible, target these communications to taxpayers who may be adversely affected by underwithholding as a result of the Making Work Pay Credit, and 2) authorize the use of the withholding tables that were in effect prior to the enactment of the American Recovery and Reinvestment Act of 2009 for pension payments to help prevent a significant number of pensioners from being negatively affected by the Making Work Pay Credit. The IRS agreed with Recommendation 1 and disagreed with Recommendation 2.

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So the IRS would rather collect tax penalties from pensioners and wage workers.

(Remember, if the health care bill passes in any form, it will be IRS who will be in charge of health insurance coverage compliance under the direction of an unelected appointee (Health Choices Commissioner, or whatever he/she will be called).)

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