Filed under: ironic press releases from the Treasury that we love to get.

News from our favorite federal taxation authority this morning reveals that while the IRS believes they did everything they were supposed to, some taxpayers may have taken their Making Work Pay credits incorrectly, causing them to actually owe money instead of celebrating free money. Oops! The Treasury Inspector General did their best to warn everyone this could happen and, oh look, it did.

Overall, the Internal Revenue Service (IRS) implemented the Making Work Pay Credit as intended by Congress, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

However, the report also found that approximately 13.4 million taxpayers who received the credit may owe taxes because adjustments to the withholding tables did not take into consideration all taxpayer circumstances. For example, single taxpayers with more than one job, joint filers where both spouses work or one or both of them have more than one job, taxpayers who receive pension payments, and Social Security recipients who receive wages are among those who may be negatively affected.

The Making Work Pay credit is an economic stimulus provision of the American Recovery and Reinvestment Act of 2009 (Recovery Act). The credit is advanced to taxpayers by their employers through withholding reductions which results in an increase in taxpayers’ take home pay. The credit is effective for Tax Years 2009 and 2010.

“The Making Work Pay Credit is a key tax credit designed to increase spending and stimulate the economy,” said J. Russell George, the Treasury Inspector General for Tax Administration. “However, many taxpayers who are accustomed to receiving refunds when they file their tax returns may have owed taxes and incurred penalties in 2009 and may yet again in 2010 because they were advanced more of the credit than they were entitled to claim,” Mr. George added. “My office issued a report in November 2009 warning of this possibility and encouraging the IRS to increase outreach and waive penalties for taxpayers who may be negatively affected by the credit. We still believe further actions are needed to ensure no taxpayer is unfairly penalized.”

The November 2009 report warning this could go down mentions that some taxpayers were proactive and adjusted their withholding so as not to be impacted by the potential “free money” presented by this “credit” which, for some taxpayers, will turn into money owed back to the Treasury or even tax penalties.

The credit was advanced to taxpayers by their employers through withholding reductions that result in an increase in take home pay, in the hopes that $400 ($800 for joint filers) more in each eligible taxpayer pocket might help increase spending and stimulate the economy. Because of the nature of the credit, however, some taxpayers may have had their taxes underwithheld at the end of the year.

Intended to stimulate whose economy?