The tax credit that punishes

By Eva Rosenberg, MarketWatch

LOS ANGELES (MarketWatch) -- The Making Work Pay tax credit is causing some nasty surprises for some taxpayers who ended up with a withholding shortfall due to the credit.

Some people who are married or have multiple jobs found themselves coming up short for the first time ever due to the withholding-tables adjustment required for that tax credit -- and taxpayers are likely to experience this problem again this year, according to the good folks at the IRS Stakeholder meeting in Los Angeles recently.

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You can request to waive last year's underpayment penalty. The IRS website has a tip to help you do that, but it isn't really helpful. The web page points you to Form 2210, but doesn't tell you how to use it. See the IRS page.

Here's what you should do: In Part II of Form 2210, check box A, requesting a full waiver of the penalty. Fill out Part I. Include a cover letter explaining that the penalty is the result of the Making the Work Pay credit.

You can avoid a penalty on this year's tax bill by making sure you have enough withholding this year. Use the IRS withholding calculator to see whether it's necessary to adjust your paycheck for the rest of the year. See the withholding calculator on IRS site.

Spouses in conflict

Karen Hawkins, director of the IRS Office of Professional Responsibility recently asked tax pros an interesting question: "Do you know when a husband and wife have a conflict of interest, when it comes to their tax issues?

This is an important issue for you to know. Look at the instances when your tax return shows a balance due. What caused that tax bill? Quite often, one spouse has enough withholding, while the other doesn't. Or one spouse has a job, with withholding, while the other spouse has a business. He or she should have made estimated taxes, but didn't. Or one spouse has investments with profits, and no estimated taxes were paid. Essentially, the balance due is often the result of one spouse's income, without adequate tax payments during the year.

Couples don't see this as an issue for conflict. They have solid marriages and one person's bill is the other person's obligation. However...let's get past the fantasy, OK? The fact is, most marriages tend to break up over financial troubles. One spouse simply can't seem to earn enough to cover his or her own spending habits. The less they earn, the more they seem to spend on secret compulsions to cover their shame, digging that financial hole ever deeper.

Filing a joint tax return obligates both the husband and wife to the other's tax debt. Filing separately can protect the responsible spouse from the mounting tax debts created by the one you love. While you're at it, consider separating your assets, to protect vital things, like your home, from IRS liens and levies.

If you find yourself in this sad situation, be sure to work with a good team of advisers. You need an experienced enrolled agent, CPA, or tax attorney -- and an attorney who can prepare deeds and contracts. You have two goals here. One is to protect assets you cannot afford to lose. The second is to make sure you don't transfer or hide assets in such a way that the IRS will think you are hiding assets to prevent the tax agency from collecting them to pay a tax debt. It's a fine line.

Of course, you can always continue to file jointly and use the "innocent spouse" protection. Unfortunately, the IRS does not always accept a spouse's claim of innocence. In fact, the IRS often rejects innocent spouse claims. It's easier not to be tied to your spouse's debt in the first place.

Three more reasons some spouses choose not to file jointly?

• The other spouse can never get his or her data together in time. Rather than filing a past-due tax return (after extensions are exhausted), just file your own tax return. Your spouse can catch up later. That eliminates a lot of stress and bitterness.

• You don't know what your spouse is up to financially, and may be concerned about illegal activities. Filing separately may protect you. Sometimes you'd really prefer not to communicate.

• Protect your credit score. Perhaps by keeping your finances and taxes apart, at least one of you can retain a high FICO score and make new purchases, credit cards and loans possible for the household.

On a positive note

Believe it or not, there are masses of people at the IRS and the Taxpayers Advocate Service (TAS) whose job it is to make your life easier. IRS and TAS staff are trying to improve forms, find better and easier ways to communicate with you and to help you understand the tax system -- and even to solve your tax payment problems. If you have constructive ideas on how to improve the system, please, let me know. I'll be happy to pass your ideas on to the Internal Revenue Service.

Eva Rosenberg, enrolled agent, is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and e-books , including "Small Business Taxes Made Easy." She teaches a tax pro course at IRSExams.com.

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