How an IRS Snafu Could Threaten Your Refund
Life + Money

How an IRS Snafu Could Threaten Your Refund


A 2009 stimulus provision meant to boost workers’ take home pay might result in surprise tax penalties for 13.4 million taxpayers in 2009 and 2010 in addition to the loss of any tax refunds, according to a new government audit released Thursday.

The report found that the Internal Revenue Services’ recently-updated withholding tables (meant to accommodate the tax credit) could cause millions of taxpayers to under-withhold taxes from their pay, which in turn will bring on an additional tax bill and an estimated tax penalty fine when they file.  The IRS reported that though the average 2010 refund was $2,892—a rise from $2,663 in 2009--- the number of total refunds dropped by 3.5 percent overall.  Confusion fueled by the Making Work Pay tax credit, which credits working couples $800 and individuals $400 on their 2009 and 2010 returns, may have contributed to the drop in refunds, according to the report.

Even though the report found that the Internal Revenue Service marshaled the Making Work Pay tax credit as Congress stipulated in the 2009 Recovery Act, the withholding table changes didn’t account for some common taxpayer situations, such as single people with multiple jobs, young workers claimed as dependents by their parents, Social Security enrollees, pension recipients, and married couples who are both employed. 

“The IRS's new withholding tables were available to taxpayers four days after the (Recovery) Act was passed, which was no small accomplishment,” wrote Richard Byrd Jr., the head of the agency’s wage and investment division in a response to the report. “While (our) extensive efforts significantly mitigated the risk of taxpayers being assessed a penalty as a result of the under-withholding issues, we acknowledge that some taxpayers could have been impacted.” 

The IRS agreed to the U.S. Treasury Inspector General for Tax Administration’s (TIGTA) recommendation that they clarify the withholding adjustment directions in the IRS website, but only “partially” agreed to reach out to individual taxpayers who owed the tax fine based on the Making Work Pay Tax credit and alert them of their right to get that penalty lessened.   

And it turns out good-old public relations could be another root cause of the upheaval.  The report found 88 percent of taxpayers who responded to their questionnaire said they were not aware of the tax credit’s existence, thus they had no knowledge that they had to change their withholding, the report concluded.  

The tax credit itself is problematic for its inability to spell out all of the different scenarios taxpayers experience, a TIGTA official said.  The credit’s very layout needs legislative attention, the official added.

Some in the accounting world are hardly surprised there are withholding mix-ups.  “Withholding tables, just by their nature make certain assumptions that don’t always hold true,” said Manhattan-based CPA Michael Block.  “It’s unfortunate that in order to rectify it would involve an accountant or require a taxpayer to claim a waiver when the rule is so complicated,” he said.  “It might be virtually impossible to do it yourself.” The problems are fixable, but it may just be too late in the game, he added. 

Though the credit expires January 1, a two percentage point Social Security payroll tax cut will likely serve a similar purpose over the next two years if the Obama-GOP tax extension compromise is approved by the House.