Rebates Cause Confusion on Tax Returns

Last year’s tax refund checks are creating widespread problems now that tax filing season has started.

The “rate-reduction credit”--a credit of $300 to $600 to compensate those who didn’t get tax refund checks last summer--is emerging as the most common mistake on tax returns this year, IRS spokesman Don Roberts said.

Some taxpayers who received refund checks are improperly attempting to claim the credit, the IRS said. Others, who didn’t get checks but are due benefits under the law, are failing to claim them.

Tax-processing centers around the country are reporting that errors with the refund-check credit are far more common this year than mistakes in reporting Social Security numbers, which typically bedevil millions of filers and rank first among taxpayer errors, Roberts said.

The rate-reduction credit is far more complicated than it may appear, tax preparers say. The rate-reduction credit worksheet asks taxpayers whether they received an “advance payment of 2001 taxes” through refund checks. If so, they’re supposed to reduce their rate-reduction credit by the amount of that payment.

However, millions of Americans never received a refund check--but not because they weren’t entitled to one. Their checks were confiscated or reduced to satisfy unpaid taxes, defaulted student loans or back child-support payments, government officials said.

The Internal Revenue Service withheld or reduced more than 6.5 million refund checks to pay back-tax debts, Roberts said. An additional 1.5 million individuals had their refunds confiscated or reduced to repay student loans or money owed Veterans Affairs, child-support authorities or state tax authorities, said Alvina McHale, a spokesman for the government’s Financial Management System. FMS also issued roughly half a million checks that were returned as undeliverable by the Postal Service.

The bottom line: 84.5 million of the 91.3 million individuals whom the IRS identified as being due refunds got checks.

“There are all these people who got the credit but didn’t get checks,” said Brenda Schafer, senior tax research coordinator at H&R; Block in Kansas City. “If you got less than the maximum, or if you don’t remember how much you got or whether you got a benefit, it becomes an issue.”

Those who can’t remember whether they got full refunds can call the IRS’ telephone tax line at (800) 829-4477. This automated line instructs callers to press “1” to find out the amount of the advance payment credited to their account last year, which is used to offset the rate-reduction credit.

If the amount matches the maximum rate-reduction credit for the individual’s filing status--$300 if single; $500 if a head of household; and $600 if married, filing jointly--the rate-reduction credit cannot be claimed again on the 1040.

There’s another complication for people who can be claimed as dependents on someone else’s return. These individuals did not qualify for refund checks; technically, the law also barred them from getting rate-reduction credits.

However, the rebate checks and the rate-reduction credit are aimed at passing on the benefit of the newly created 10% marginal tax bracket, which applies to the first $6,000 in income earned by single filers; $10,000 earned by heads of households; and $12,000 in income earned by married couples.

The whole process will be simpler next year because the 10% bracket will be accounted for in tax tables and won’t require worksheets or computations, the IRS said. In the meantime, IRS officials urge taxpayers to carefully read the instructions.