Early Filers Pile on Errors

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To err is human -- especially this year.

As if doing your tax return wasn't tricky enough, it's particularly easy to make mistakes this year, thanks in large part to the economic-stimulus payments sent out in 2008 to nearly 120 million filers. An early sampling of tax returns received by the Internal Revenue Service this year shows about 15% made mistakes involving what's known as a "recovery rebate credit."

This is a special benefit for millions of people who didn't receive the full stimulus payment last year but now are eligible for some, or all, of the unpaid portion because of a change in circumstances, such as losing a job or having a child.

Even by tax-law standards, this subject can be remarkably confusing. Last year, the IRS received tens of millions of phone calls from taxpayers about the stimulus payments. The agency had to transfer workers temporarily from other areas, including enforcement operations, to deal with the unexpected avalanche of calls. This reporter has received more reader questions on the stimulus payments than on any single tax issue in the 15 years he has written this column.

Now, IRS officials say, the problem has spilled over into this year's filing season. Some early birds who have already filed took the credit even though they weren't entitled to it. Others claimed the wrong amount or made other bloopers. To make matters worse, scam artists are using the confusion to prey on unsuspecting taxpayers in an effort to steal their identity and raid their financial accounts.

The agency is also getting peppered with taxpayer questions about other issues -- such as whether the stimulus payments are taxable. The answer is no, according to the IRS; those payments are tax-free. Another common question: If I didn't get anything last year or received less than the full amount, am I now out of luck? Answer: Most people who got a payment last year won't qualify for an additional credit on their 2008 return. But millions of people who didn't get anything, or got less than the full amount, are indeed eligible this year for the recovery rebate credit -- if they can figure out how to decipher the rules and claim it.

"We're seeing lots of people surprised they can claim it," says Nancy Mays, a spokeswoman for H&R Block Inc. the tax-preparation company.

Here's some background on the problem and advice on how to handle it:

How the stimulus payments work. The economic-stimulus payments were included in legislation approved early last year by Congress. Through the end of 2008, the U.S. Treasury had distributed more than 119 million payments totaling more than $96 billion.

Typically, the payments were for as much as $600 for an individual, or $1,200 for married couples who file jointly -- plus $300 for each eligible child under age 17. But millions of people didn't qualify for any payment, or got less than the full amount, because their income for 2007 exceeded certain limits. (The payment amount phased out for those with adjusted gross income exceeding $75,000, or joint filers with income above $150,000.)

What some people didn't realize is that eligibility for a payment is based on your income and other factors, such as family size, reported on your return for either 2007 or 2008. That's important. That means if you weren't eligible because of what was shown on your return for 2007 or got less than the maximum amount, you still might qualify for a recovery rebate credit on your return for 2008, to be filed this year.

You might be eligible if you lost your job and your 2008 income plummeted, for example. Or if your family had a child last year. Or if you were claimed as a dependent on someone else's return in 2007 but can't be claimed as a dependent by someone else in 2008. Or if you're a low-income retiree or disabled veteran who didn't file a return last year.

What to do now. Check your records to see how much of a stimulus payment, if any, you received last year. That will help you figure out whether you're eligible for the recovery rebate credit now.

But don't enter the amount of your stimulus payment directly on your tax return, the IRS says. For people using paper and pencil, the stimulus payment will be required in order to complete a related worksheet. For people using tax-preparation software, the stimulus payment amount will be needed as part of the return-preparation process.

The IRS says there are several ways you can find out how much you received last year. Check the amount listed on "Notice 1378," which the IRS mailed last year to those who got a payment. Or go to the IRS Web site (www.irs.gov) and click on the "How Much Was My Stimulus Payment?" tool. Or call the IRS at 866-234-2942. (If you call, you'll need to provide your filing status, Social Security number and number of exemptions.)

Then enter the figure on the recovery rebate credit worksheet, or in the appropriate location in tax-preparation software, the IRS says. The software should calculate and report it properly. But if you're doing your return by hand, this credit, as calculated on the worksheet, should be reported on Line 70 of Form 1040, Line 42 of Form 1040A or Line 9 of Form 1040EZ.

"For most taxpayers, the correct entry for the recovery rebate credit will be either be blank or zero," the IRS says.

If you're not sure how much to report, the IRS says to enter zero on the appropriate line, and the agency "will determine whether a recovery rebate credit is due, and, if so, how much."

Scams and myths. Scam artists have sent emails trying to entice taxpayers into divulging personal information that can be used for identity-theft purposes. In one recent example, the email said: "After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a Stimulus Payment. Please submit the Stimulus Payment form in order to process it." You're supposed to "please download the attached document." It concludes: "Regards, Internal Revenue Service."

Needless to say, don't take the bait. "It's bogus, and it's a variation on a theme we've been seeing for a while," says Eric Smith, a spokesman for the IRS, which has issued a consumer alert on the subject.

Separately, the IRS says it's aware of reports that errors in claiming the credit could delay tax refunds for as much as eight to 12 weeks. "These reports are false," the IRS says. "As the IRS detects and corrects return errors" on the credit, "refund delays are currently no longer than about one week."

Some people are confused about how they'll receive this credit. The Treasury won't be issuing separate recovery rebate credit payments, as it did last year. Instead, if you're eligible, you're supposed to claim the "rebate" credit on your return for last year, which means it will affect your refund or how much you owe.

The IRS warns taxpayers not to use their regular refund from last year in calculating the recovery rebate credit. "Some taxpayers may be confusing their regular tax refunds with the economic stimulus payment they received when completing their 2008 tax return," the IRS says.

For more details, go to the IRS Web site and click on "Avoid Recovery Rebate Credit Confusion."