The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its review of the Internal Revenue Service's administration of the Making Work Pay Credit (MWPC).
The MWPC, a provision of the American Recovery and Reinvestment Act of 2009 (the Recovery Act), applies to most taxpayers who earn income during 2009 and 2010. The credit is advanced to taxpayers by their employers through reduced withholding, resulting in an increase in take-home pay.
The objective of TIGTA's review was to assess IRS efforts to implement the MWPC and evaluate its impact on taxpayers. TIGTA found that the implementation of the MWPC creates the possibility that more than 15.4 million taxpayers may be advanced more of the credit (through reduced withholding) than they are entitled to receive. When filing their tax returns for 2009 and 2010, such taxpayers may ultimately owe additional taxes. Some also may be subject to estimated tax penalties.
The MWPC was implemented using new income tax withholding tables. However, the changes to the withholding tables did not take into consideration: dependents who receive wages; single taxpayers with more than one job; and joint filers where one or both spouses have more than one job or both spouses work. Other groups potentially affected include: individuals who file a return with an Individual Taxpayer Identification Number; those who receive pension payments; and Social Security recipients who receive wages.
"While implementing a credit through reduced withholding is an effective way to provide economic stimulus evenly throughout the year, it is difficult to account for everyone's circumstances," commented J. Russell George, the Treasury Inspector General for Tax Administration. "More than 10 percent of all taxpayers who file individual tax returns for 2009 could owe additional taxes because their withholdings were reduced by more than the Making Work Pay Credit. If corrective actions are not taken, this problem will continue to plague taxpayers in 2010," added Inspector General George.
TIGTA recommended that the IRS increase media coverage, consider ways of advertising other than the media already being used, and target communications to taxpayers who may be adversely affected as a result of the MWPC. TIGTA also recommended that the IRS use the withholding tables that were in effect before the enactment of the Recovery Act for pension payments in order to prevent pensioners from being negatively affected by the MWPC.
The IRS agreed with TIGTA's first recommendation and plans to take corrective action. However, the IRS did not agree with the second recommendation, claiming that it would be burdensome and costly.