Thorns in Making Work Pay Credit for Some Taxpayers, Says TIGTA

Thorns in Making Work Pay Credit for Some Taxpayers, Says TIGTA

The Making Work Pay Credit, an economic stimulus provision included in the American Recovery and Reinvestment Act of 2009, was intended to provide an increase to employees' take home pay by reducing the amounts withheld from employees' paychecks throughout the year. The credit, which was designed to encourage spending in an effort to stimulate a sagging economy, was effective for tax years 2009 and 2010.    

A report issued by the Treasury Inspector General for Tax Administration (TIGTA), an office formed under the Restructuring and Reform Act of 1998 to provide independent oversight of IRS activities, found that, despite the best intentions of the government in enacting the credit and correct implementation of the credit by the Internal Revenue Service for the most part, many taxpayers found themselves owing taxes for the 2009 tax year as a result of the credit.  [1]

The TIGTA report found that many taxpayers who were accustomed to receiving refunds when they filed their tax returns owed taxes, and even penalties, for the 2009 tax year as a result of receiving more credits than those to which they were entitled.  For the most part, the adverse effect on these taxpayers resulted from the fact that the withholding tables did not take into account various tax situations. Taxpayers that may have been adversely impacted include single taxpayers with multiple employers, joint filers where one or both spouses have more than one employer, and taxpayers with pension income or Social Security payments who also have wage income.  The TIGTA report estimated that a number of taxpayers incurred estimated tax payment penalties, as well as owing taxes at the end of the year, as a result of the credit. 

In its report, TIGTA made two recommendations to avoid this problem in future credit situations. The report recommended that, to avoid this problem for taxpayers, the Service should consider including simplified withholding adjustment instructions on the Service's website for specific situations that can result in underwithholding as a result of credit implementation, and identifying taxpayers that could owe estimated tax penalties as a result of credit situations that reduce withholding and advising them of their right to have a portion of the penalty relating to the credit abated. While the Service agreed with the first recommendation, it was in only partial agreement with the second recommendation. While the Service agreed to increase its outreach efforts, it declined to contact specific taxpayers to advise them of potential problems that could give rise to additional tax liability and penalties.

For tax years after 2010, the Making Work Pay credit has been replaced by a reduction in payroll taxes.  The reduction, which was included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, reduces the employee portion of Social Security taxes (though not the employer's portion) from 6.2 percent to 4.2 percent. As a result, the tax consequences felt by those taxpayers affected by the Making Work Pay credit does not apply to tax years after 2010.  For taxpayers filing in 2011 for the 2010 tax year who were adversely affected by the credit in the 2009 tax year, however, the credit can find themselves in the same situation for the 2010 tax year. 


TAFC Explanation:  IRC Sec. 36A

Lexis Tax Advisor -- Federal Topical 1F:7.03


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[1] See, Treasury Inspector General for Tax Administration press release, Dec. 16, 2010, at