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Tax Time Troubles Caused by Stimulus

While it is true that the economic stimulus did create many money saving opportunities at tax time, it seems to have also created a few traps and problems are beginning to surface as IRS computers systems are rejecting 1040’s submitted by retirees and working couples are finding that they have been charged unexpectedly. Apparently, the problem lies with the tax break that was included in the big stimulus bill that Congress passed last year called the “Making Work Pay” credit.

It recently came to light that IRS computers were en masse rejected electronically filed returns of retired seniors and some part time workers. As it turns out, the credit–usually paid through lower tax-withholding rates of $400 per worker is reduced by the also-new $250 per person. This “Economic Recovery Payment” is sent to Social Security recipients and veterans on disability. Supposedly, the senior filers didn’t accurately state whether they got the $250 payment when filling out the new Schedule M for the Making Work Pay credit and that is why their electronically filed returns were rejected by the IRS system.

Robert Meighan, a CPA and vice president of Turbo Tax, Intuit’s tax preparation software unit, reports that this confusion about the lowered $250 tax credit has caused more discrepancies in filing returns this year than any other single factor. It seems that some of the senior tax payers simply had no idea that they got the $250 because it was directly deposited into the same bank accounts their Social Security is put in. The payment isn’t taxable and, absurdly enough, it wasn’t listed on the annual benefits statement Social Security recipients are sent for tax purposes.

But William Stevenson, a Merrick, N.Y., tax accountant, insists the IRS database is flawed. “They say people were eligible for the payments who may not have received it and then their returns get bounced,” he complains. Those taxpayers may have to re-file their returns reporting the $250 per person they don’t believe they got, then request a letter from the Social Security Administration attesting they didn’t get the payments, and then file amended returns, he says. A lot of work for a smallish check.

Another big problem is looming on the horizon. Many tax payers, mostly two-income couples, people who have more than one job and college students are facing unexpectedly large tax bills, because apparently, their withholding was reduced too much. The Treasury Inspector General for Tax Administration estimates more than 15 million taxpayers could owe more. The IRS insists that number is way too big, but tax payers are waking up to the possibility that instead of expecting a refund from the government, they will be writing checks to it.

On the other hand, some of the affected taxpayers aren’t eligible for the Making Work Pay credit because they can be claimed as dependents on their parents’ returns or because they earn too much. “Some people will be very surprised and very unhappy,” says Mary Mellem, an enrolled agent in Green Bay, Wis., who is breaking the bad news to clients who didn’t heed her warnings last year to revisit their withholdings.

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