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THE NATION : Taxpayers could get a surprise bill : More than 15.4 million may have to repay part of a stimulus-related credit, a government watchdog report says.

November 17, 2009|Jim Puzzanghera and Tiffany Hsu

WASHINGTON AND LOS ANGELES — More than 15.4 million Americans soon could learn that what the tax man giveth, the tax man can take away.

Those people, surprisingly, could owe taxes for 2009 because of complications in the Making Work Pay tax credit, a cornerstone of the $787-billion economic stimulus package enacted in February, according to a government watchdog report released Monday.

More than 1.2 million of them could face Internal Revenue Service penalties, at least technically.

"It definitely is going to be a surprise to some taxpayers, who are either going to have a balance due or a reduced refund this year," said Melissa Labant, technical manager on the tax staff of the American Institute of Certified Public Accountants. "I'm concerned about those people who are spending those refunds, which in fact they might not be going to receive."

About 1 of every 10 people who file taxes, particularly those with more than one job, might have had too little withheld this year, meaning they have to make up the difference by April 15, according to the report by the Treasury Department's inspector general for tax administration.

That difference depends on how much more they received beyond the allotted amount of $400 for each individual taxpayer and $800 for those filing joint returns. A person working two jobs, for instance, could have received twice the amount in tax credits and would have to pay back half of it.

Those with multiple sources of income -- people with two or more jobs, dual-income couples filing jointly, and workers also receiving Social Security or pension benefits -- are more likely to be affected, the inspector general's report said.

The IRS and tax specialists had warned on websites and press releases earlier this year that taxpayers should check their withholding status to make sure they weren't getting more credits than they were entitled to. But the complexities of withholding taxes were lost on folks like Ken Mueller.

"A lot of people looked at this and thought it was free money, but didn't understand the implications," said Mueller of Lancaster, Pa.

Mueller, 47, couldn't take advantage of the full credit. In March, the radio station where he works in marketing cut his hours to 20 a week.

"You're in a situation where you're kind of living hand-to-mouth, and if I have to give money back, it's going to hurt," he said.

Retailers said it was too early to know whether lower refunds or higher payments next April would affect the typical tax-season sales. For the current holiday season, "it's doubtful" that the tax credit problem would make shoppers spend less, said Ellen Davis, vice president of the National Retail Federation.

"The larger issue for the holiday season this year is the astronomically high unemployment rate and the troubled housing market," she said. "Any impact this tax credit will have is expected to be minimal."

And tax preparers, such as Steve Rousso in Sherman Oaks, said the situation was "a tempest in a teapot."

"In all likelihood, it will reduce the refund, but essentially most people won't notice it," he said.

Still, some members of Congress were quick to criticize the Obama administration.

"People will get help this year and have it taken away next year and might even pay penalties," Sen. Charles E. Grassley (R-Iowa) said. "It amounts to a bait-and-switch for these taxpayers, and that's not the way tax policy ought to treat people."

The IRS downplayed the problem, saying about three-quarters of those filers will simply get a smaller refund rather than having to pay money out of their pockets. The agency estimated that only 65,000 people would face penalties. Nevertheless, the IRS said Monday that any taxpayer facing such a penalty would be able to get a waiver.

"We don't want this to adversely affect any people," IRS spokesman Eric Smith said.

The credit, heralded as part of the stimulus, fulfilled a major campaign promise by President Obama to cut middle-class taxes.

Treasury Department officials last week stressed that the tax credit delivered "much-needed boosts to the paychecks of 95% of all working Americans," estimating that more than 110 million families had received up to $60 more a month in take-home pay since the credit went into effect.

Tax credits usually are applied to income tax returns to reduce the amount owed. But to maximize the economic stimulus of the Making Work Pay credit, workers started getting more money in their paychecks in April after the government instructed employers to withhold less taxes.

With each employer cutting withholding, a person with more than one job or spouses who both work could get the benefit twice -- or more.

The full tax credit applied to single filers with up to $75,000 in adjusted gross income, or $150,000 for those filing jointly. A reduced credit is available for people with up to $95,000 in income or couples with $190,000.

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