Mutual funds and their investors have a mutual problem.

Thanks to congressional action last year and inaction this year, some 20 million shareholders in nearly 2,000 mutual funds will have to pay taxes this year on income they never saw.

And the mutual funds, which must calculate the amount of that income, apparently will have to do so without the guidance of Internal Revenue Service regulations.

"We are facing a complicated set of circumstances," said L. Erick Kanter of the Investment Company Institute, a trade association of mutual funds.

"Here we are, two weeks from the end of the year ... and funds are gearing up to mail out 1099s," the tax forms that tell shareholders and the IRS how much income the shareholder received. But the funds can't determine what the 1099s should say "because the rules aren't out," Kanter said.

Additionally, "most people aren't accustomed to paying taxes on money they didn't receive," he said, so there could be confusion.

Until this year, figuring a mutual fund shareholder's taxable income was simple; it was whatever the fund had actually paid.

With the coming of tax revision, however, Congress restricted deductions for many miscellaneous items, including investment advice.

But the tax writers worried that some well-to-do individuals might get around that restriction by structuring their investments as a mutual fund, so the lawmakers forbade funds from subtracting investment-advice expenses from payments to shareholders.

Instead, the funds must report a portion of their expenses as if the shareholders had actually paid them. And the income from the fund must be reported as if it had actually been received by shareholders. The shareholders in turn may then deduct the expenses on their own income tax returns.

The hitch is that many mutual fund shareholders do not itemize their deductions.

For those who do, investment advice falls into a category of deductions that may be taken only to the extent that they exceed 2 percent of the taxpayer's adjusted gross income. The net result for most shareholders will be phantom income and no deduction.

The provision, which was added to the tax revision bill shortly before passage last year, has been widely protested. Much of the industry and even the IRS were expecting it to be repealed.

Repeal was included in the House's version of the budget deficit reduction bill, but not in the Senate's. After the conferees adopted the general rule that no revenue-losers would be approved, repeal, which would cost an estimated $250 million, fell by the wayside. Although it remains technically possible for it to be restored, those close to the conferees regard repeal as very unlikely.

Regulations have been drafted by the IRS and sent to the Treasury Department for review. Treasury officials would give no indication of when the rules might be published, saying only that they were "aware" of the administrative problems involved.

The tax burden will not be heavy for most individuals -- although, in the absence of IRS regulations, no one is sure exactly what that burden will be.

Mutual fund shares held in individual retirement accounts will not be affected, nor presumably will shares in tax-exempt bond funds and tax-exempt money market funds.

For the rest, the exact amount of phantom income will depend on how much of the fund's overhead the IRS decides to attribute to investment advice.

The industry argues that only the portion of fund expenses "that really has to do with managing the portfolio could be included," and not such ordinary business expenses as office rent and the like, according to the Investment Company Institute's Kanter.

"The idea is to separate out the cost of portfolio management. We had argued that this is about 22 percent" of a fund's expenses. "Our sense is the {regulations} will come out somewhere between 22 and 50 percent," he said.

Kanter said that on average, a fund's overall expenses equal about 1 percent of the value of its assets. Thus, if a shareholder's investments were worth $10,000, about $100 in expenses would be attributable to him.

If the IRS allocates 30 percent of the fund's expenses to investment advice, the shareholder would have $30 in phantom taxable income.

But while that is the average, individual cases could differ widely, Kanter noted. Because the expense figure is derived from a fund's assets and not its distributions, shareholders in an aggressive growth fund that has little in the way of dividends could find their phantom income exceeds their real income.

On the other hand, holders of a high-yield bond fund might record a tiny increase in taxable income.

In most cases the confusion factor may be more important than the actual money involved. Funds' 1099 forms are likely to be late, tempting early filers to use the income figure from their year-end statement from the fund.

But that won't match their 1099 that will be sent to the IRS -- making the kind of mismatch that invites extra attention to a return.

The mutual funds are waiting, meanwhile, for IRS guidance.

Steven Norwitz of T. Rowe Price Inc., the big Baltimore mutual fund operator, said his firm will be mailing out 1099s in late January, instead of at the end of this month, and has redesigned the form to show total taxable income and expenses.

"It's also likely we'll enclose an explanatory letter telling people about the phantom tax and how to interpret the 1099," he said.