Millions Face Higher Taxes After US Stimulus Credit Backfires

by Leroy Baker, Tax-News.com, New York

18 November 2009

President Obama's attempt to stimulate the US economy through his flagship Making Work Pay Tax Credit (MWPC) may have backfired after an investigation by a government watchdog found that millions of Americans may get more credit than they are entitled to, leaving some to face higher tax bills next year.

A review of the Internal Revenue Service's (IRS) administration of the tax credit by the Treasury Inspector General for Tax Administration (TIGTA) suggested that more than 15.4 million taxpayers may be advanced more of the credit as a result of reduced withholding than they are entitled to receive.

TIGTA warned that as a consequence of this, when taxpayers file their 2009/10 tax returns they may find that they owe additional taxes, while some may be subject to estimated tax penalties.

The MWPC, a provision of the American Recovery and Reinvestment Act of 2009 (the Recovery Act), applies to most taxpayers who earn income during 2009 and 2010. The credit is advanced to taxpayers by their employers through reduced withholding, resulting in an increase in take-home pay.

TIGTA's review found that the changes to the withholding tables did not take into consideration a number of important factors, including: dependants who receive wages; single taxpayers with more than one job; and joint filers where one or both spouses have more than one job or both spouses work. Other groups potentially affected include: individuals who file a return with an Individual Taxpayer Identification Number; those who receive pension payments; and Social Security recipients who receive wages.

"While implementing a credit through reduced withholding is an effective way to provide economic stimulus evenly throughout the year, it is difficult to account for everyone's circumstances," commented J. Russell George, the Treasury Inspector General for Tax Administration.

"More than 10% of all taxpayers who file individual tax returns for 2009 could owe additional taxes because their withholdings were reduced by more than the Making Work Pay Credit. If corrective actions are not taken, this problem will continue to plague taxpayers in 2010," he went on to warn.

TIGTA recommended that the IRS increase media coverage and advertising to communicate with those taxpayers who may be adversely affected as a result of the MWPC.

TIGTA also recommended that the IRS use the withholding tables that were in effect before the enactment of the Recovery Act for pension payments in order to prevent pensioners from being negatively affected by the MWPC.

The IRS agreed with TIGTA's first recommendation and plans to take corrective action. However, the agency did not agree with the second recommendation, claiming that it would be burdensome and costly.

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