AHLSTARZ Tax and Accounting Service -- Numbers, Simplified.

More than 15 million taxpayers may see their refunds reduced or owe more in taxes when they file their 2009 and 2010 returns because of the Making Work Pay credit (MWPC), the Treasury Inspector General for Tax Administration (TIGTA) warned on November 16 ("Millions of Taxpayers May Be Negatively Affected by the Reduced Withholding Associated With The Making Work Pay Credit" (Reference No. 2010-41-002)). The MWPC is being advanced to taxpayers by employers through reduced withholding in 2009 and 2010. The IRS countered that TIGTA's projections are overstated, noting that the government watchdog did not take into account taxpayers who have already adjusted their withholding for the MWPC.

The MWPC needs to be part of year-end tax planning, Melissa Labant, CPA, tax manager, American Institute of Certified Public Accountants (AICPA), told CCH. "Many individuals plan in advance on their refunds and spend the money before they receive it. For some, there will be an unpleasant surprise when they file in 2010."

MWPC

The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) (P.L. 111-5) created the temporary MWPC. In 2009 and 2010, the MWPC provides a refundable tax credit of up to $400 for single individuals and up to $800 for married taxpayers filing joint returns.

The MWPC is being delivered through automated withholding changes. The IRS issued revised withholding tables in February to reflect the MWPC (IR-2009-13; TAXDAY, 2009/02/24, I.1). Taxpayers do not have to submit a new Form W-4, Employee Withholding Allowance Certificate. In some cases, however, the MWPC could result in insufficient income tax being withheld unless the taxpayer adjusts his or her withholding.

Impact

According to TIGTA, approximately 15.4-million taxpayers may be negatively affected by the MWPC. Taxpayers may be advanced more of the MWPC than they are entitled to receive. Consequently, they may owe taxes when filing their 2009 and 2010 returns and may be liable for estimated tax penalties. In other cases, taxpayers may discover that their refunds will be less than expected.

TIGTA identified six groups of taxpayers most at risk:

(1) Single taxpayers with more than one job;

(2) Joint filers in households where both spouses work or where one or both spouses have more than one job;

(3) Taxpayers who receive pension payments;

(4) Taxpayers who are employed and receive Social Security or similar benefits;

(5) Dependents who receive wages; and

(6) Individuals who file a return with an individual taxpayer identification number (ITIN).

Labant noted that TIGTA's projections all used basic similar assumptions. "Every taxpayer is unique," she said. Labant recommended that taxpayers use the IRS's online withholding calculator to review their withholding.

Disputed Number

The IRS disagreed with TIGTA's 15.4 million projection. "The estimate is overstated as it does not account for important categories of taxpayers for who this issue is not present; for example, taxpayers who have multiple sequential jobs throughout the year or pensioners whose plan administrators have already adjusted withholding," Richard Byrd, Jr., commissioner, IRS Wage and Investment Division, told TIGTA.

Byrd also disputed that millions of taxpayers will owe additional taxes. "While the report indicates that some taxpayers will be negatively affected by the MWPC, it does not explain that this means a reduced refund and not an out-of-pocket tax liability," Byrd said. "In effect, these taxpayers will have received a portion of their refund throughout the year in the form of reduced withholding, which is exactly what the law intended."

Some taxpayers may be liable for an estimated tax penalty as a result of insufficient withholding, Byrd acknowledged. "Taxpayers may request that the IRS waive the penalty," he noted. Byrd indicated that the IRS will alert taxpayers about how to request a penalty waiver.

Reaction

"Making Work Pay was designed to deliver much needed boosts to the paychecks of 95 percent of all working Americans," a Treasury Department spokesperson told CCH. "The IRS has worked quickly and effectively to ensure that taxpayers received the benefit of this credit as soon as possible --starting just days after the 2009 Recovery Act became law --and will continue to do so going forward."

TIGTA's predictions however, drew a sharp reaction from Senate Finance Committee ranking member Charles E. Grassley, R-Iowa. "People will get help this year and have it taken away next year and might even pay penalties. It amounts to a bait and switch for these taxpayers and that is not the way tax policy ought to treat people."

The MWPC is one tax incentive that President Obama's Task Force on Tax Reform is currently reviewing (TAXDAY, 2009/03/26, W.1). Obama has urged Congress to make the MWPC permanent.

By George L. Yaksick, Jr., CCH News Staff

TIGTA Press Release: Millions of Taxpayers Could Owe Taxes as a Result of Making Work Pay Credit

TIGTA Report: Millions of Taxpayers May Be Negatively Affected by the Reduced Withholding Associated With the Making Work Pay Credit (Reference Number: 2010-41-002)

SFC Press Release: Grassley's Comments on Report on the Making Work Pay Credit