Monday, November 23, 2009

Estimate: Millions Could Owe Taxes Due to Making Work Pay Underwithholding

The Treasury Inspector General for Tax Administration estimated in a report released Nov. 16 that more than 15.4 million taxpayers could unexpectedly owe taxes for tax year 2009 as a result of having their taxes underwithheld for the Making Work Pay credit.

The credit, created by the American Recovery and Reinvestment Act of 2009, is in effect for tax years 2009 and 2010. The credit is advanced to taxpayers through their wages by modified income tax withholding tables, TIGTA said. This decreased federal withholding “creates the vulnerability that some taxpayers may have their taxes underwithheld at the end of Tax Years 2009 and 2010,” it said.

TIGTA's analysis of the new withholding tables and the credit amount taxpayers are supposed to receive identified individuals who would receive more of the credit than they were entitled to get, TIGTA said. The modifications to the withholding tables do not take into account situations such as:

• dependents who receive wages,
• single taxpayers holding more than one job,
• taxpayers who receive pension payments, and
• Social Security recipients who receive wages, among others.

More than 1.2 million taxpayers who fall in these categories may have to repay some or all of the tax credit and may be assessed the estimated tax penalty or an increased tax penalty as a result of the credit, TIGTA said.

IRS is going to notify taxpayers that they can request a waiver if they are assessed the penalty or if they believe it will affect them, according to an IRS spokesman, but it is not sure what form such guidance will take.

The full text of the TIGTA report, Millions of Taxpayers May Be Negatively Affected by the Reduced Withholding Associated With the Making Work Pay Credit, No. 2010-41-002, is available at: http://www.treas.gov/tigta/auditreports/2010reports/201041002fr.pdf.

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