Tax audits from Hell for eternity
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Stimulus rebate confusion continues

April 15 is a distant memory for most taxpayers, but as the IRS works through the millions of tax year 2008 filings it has received, some folks are learning their rebate claims are causing problems.

Stimulus payment logo You remember the rebates. They were the $300 to $600 checks that were approved in February 2008, sent out that spring and were supposed to jump start the economy.

The amount of those checks was based on 2007 income, but they actually were "prebates" that were accounted for on 2008 returns as the Recovery Rebate Credit.

And that's where the trouble started.

Folks who didn't get a full (or any) rebate check last year could possibly get the money when they filed their 2008 tax returns this year.

But unfortunately for some taxpayers, the rebate claim process hasn't worked out too well.

Rebate hassles redux: In this month's Tax Fireworks Carnival, personal finance blogger The Sun's Financial Diary brought up the issue in Did TurboTax Miscalculate My Recovery Rebate Credit?

Specifically, Sun says:

"It never makes me feel good when receiving a letter from the IRS because most of the time, it's not going to be a good news (luckily I haven't got into any trouble with the IRS so far). So when I saw the letter from IRS in my mailbox today, I was first kind of a little nervous when opening up the envelope, then a little relieved once I finished with the letter.

The letter was a notice to let us know that we now owe the IRS $485.07 because 'We [the IRS] changed the amount of the recovery rebate credit you claimed on Line 70 of your Form 1040 because the amount entered was computed incorrectly.'

While it isn't as bad as an audit letter, it still made me feel that I did something wrong with our tax return, whether it's my fault or not."

But Sun isn't the only blogger to run into, and recount, a problem with the Recovery Rebate Credit.

The Wandering Tax Pro, in a special "tax buzz" post, points to's roundup of writings on the rebate ruckus.

Everybody's talking about rebates: Some folks are not getting as much as they thought they should. Others, like Sun, have had to send some money back to the IRS.

And all are trying to figure out why the discrepancies.

Obviously, these reports of 2008 returns and associated rebate problems have generated a lot of blog comments.

The remarks range from blaming TurboTax (which prompted several of the software company's folks to get involved in the online conversations) to admitted taxpayer mistakes to offsets that ate into (or totally consumed) the expected rebate amount.

In one case, the IRS even blamed, wait for it, the IRS!

Why I hate rebates: The common thread in all the discussions is just plain confusion.

That's usually the case when D.C. enacts a special tax break. The IRS shifts into high gear to get the forms and regs in order. Software companies scramble to incorporate the changes. And taxpayers get all jazzed about the free money they (might) get from Uncle Sam.

But typically, the rules on these one-off breaks are more convoluted than usual and a good number of filers end up at best disappointed and at worst just plain madder than hell at everybody involved.

Personally, I hate these gimmicky tax breaks.

Politicians -- and yes, I use that word pointedly -- make most of these changes primarily for political gain, not because it's good tax policy. And the electorate encourages them, by clamoring for such immediate money-back options.

But as the rebate confusion so clearly demonstrates, too many filers pay a big price, if not in actual dollars, then in frustration of having to deal with these special tax breaks.

Instead, federal lawmakers should get serious about making real, constructive and permanent changes to our tax system, like, for example, eliminating the alternative minimum tax. This parallel tax system has been tripping up more taxpayers every year for, uh, forever it seems, but every year, Congress can only seem to manage a temporary fix.

Sure, writing good tax policy is not an easy job, but it's not an impossible one either. And that's what Congress should be doing instead of crafting legislation that's designed simply to get them perpetually reelected.

Expect the same in 2010: A word of warning about the 2009 return you'll submit next year: the Making Work Pay credit could cause similar problems.

So far, there's not been a big problem with the credit. That's because this cornerstone of the 2009 American Recovery and Reinvestment Act, aka the stimulus act, is being accounted for via workers' paycheck withholding.

But there are some special considerations to this credit, too.

Some people aren't eligible for the credit. In those cases, the taxpayers who get the credit this year will have to pay back the money on their 2010 return.

It doesn't take a crystal ball to see the chaos, and taxpayer anger, this credit is going to cause next filing season.

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