Withholding errors could cause millions of taxpayers to repay part of stimulus tax credit

Tax tables that guide withholdings did not account for some workers whose personal situations complicated the tax credit calculation.
Tax tables that guide withholdings did not account for some workers whose personal situations complicated the tax credit calculation. (Bigstockphoto.com)
By Michael A. Fletcher
Washington Post Staff Writer
Tuesday, November 17, 2009

Some 15.4 million taxpayers could receive smaller refunds than they expected or owe taxes next year because they did not have enough money withheld from their paychecks as part of the Making Work Pay tax credit program, according to a report issued Monday.

The tax credit advocated by President Obama and enacted in February as part of the $787 billion economic stimulus plan lowered taxes for all but the nation's highest wage earners. It cut payments by as much as $400 for individuals and up to $800 for couples. Most workers started receiving the tax credit earlier this year as small reductions in the amount of taxes withheld from their paychecks.

But federal tax tables that guide those withholdings did not account for some wage earners whose personal situations complicated the tax credit calculation. That category included some workers with more than one job, some married couples in which both spouses work, and some Social Security recipients with jobs.

The Treasury Department's inspector general for tax administration estimated that more than 10 percent of all taxpayers who file individual tax returns for 2009 could owe additional taxes because of the complexities of the Making Work Pay credit. Of that group, the IRS estimated that 65,000 taxpayers could technically face penalties for underpaying their taxes in 2009, although the agency said it would waive such fees.

While the inspector general's report estimated that millions of taxpayers will be negatively affected by the tax credit, a Treasury official said the vast majority will only receive a slightly reduced refund and not an out-of-pocket tax liability on April 15.

"These taxpayers actually receive a portion of their refund throughout 2009 in the form of reduced withholding, which is exactly what the law intended," Richard Byrd Jr., commissioner of the IRS's Wage and Investment Division, wrote in response to the report.

Overall, more than three-quarters of all taxpayers receive returns, which last year averaged more than $2,800, according to the IRS.

In addition, an undetermined number of workers eligible for the Making Work Pay tax credit will also receive other tax credits passed as part of the stimulus plan, including credits for education, energy efficiency, sales tax paid for cars and a tax credit for first-time homeowners. Those credits should further reduce the number of taxpayers left with greater tax liability than they expected, IRS spokesman Eric Smith said.

"Making Work Pay was designed to deliver much needed boosts to the paychecks of 95 percent of all working Americans," Treasury spokeswoman Nayyera Haq said in statement. "Since enactment, more than 110 million families have benefited from as much as $60 in additional take home pay each month to put toward their family budgets, serving as a steady boost to spending and consumption."

Nevertheless, the IRS urged taxpayers to check their withholdings throughout the year to ensure that they are having enough tax money taken out of their paychecks. The agency also has a calculator on its Web site that allows workers to check whether they have the correct amount of tax money withheld from their pay.

© 2009 The Washington Post Company