Schedule M doesn't stand for "Making work pay"

It stands for "Making work for preparers."

Last August, when the draft version of Schedule M appeared on the horizon Kay Bell immediately posted it and predicted:

Yep, the 2010 tax filing season is going to be another wild one for tax preparers, tax software companies, the IRS and, most importantly, we taxpayers.

There are lots and lots of headaches associated with Schedule M this year.

Why do we have Schedule M in the first place?

Well the government wanted to stimulate two different groups of Americans: working folks (through a "Making Work Pay" tax credit of up to $400 per taxpayer) and retired folks (through an Economic Recovery Payment of $250 per recipient of government pension benefit plans for the elderly and disabled.)

But Congress was apparently worried about stimulating any one American TOO much.

So, in its infinite wisdom, Congress came up with another Rube Goldberg machine, which resulted in the IRS having to create Schedule M.

If you are working AND receiving Social Security, Supplemental Security, Veterans' benefits, or RailRoad Retirement benefits, the amount of your maximum Making Work Pay $400 credit is reduced by the $250 Economic Recovery Payment you got.

The problem is that lots of Americans are understandably quite confused with all this stimulus that's been going round lately.

(A whole lot of stimulating has been going on these days! Cars, houses, unemployment benefits, energy efficient appliances--this year's stimulating has everyone vibrating in confusion.)

When you ask a taxpayer, "Did you get an Economic Recovery Payment last year?" you get all kinds of wrong answers, in both directions.

Many people who actually did get them don't remember getting them and respond "No," especially since they weren't particularly labelled in a memorable way, and many folks got them by direct deposit.

Many people who did actually did NOT get them, answer "Yes" because they are confusing them with the 2008 "Economic Stimulus Payments" made the previous year.

The Social Security Administration and Veterans' Administration, the government agencies that made the payments have forwarded their records of the payments to the IRS, but the government didn't bother to forward the records to the taxpayer!

Excuse me?

If a bank or other financial institution pays a taxpayer $10 or more in interest, it is required to issue a 1099-INT to the taxpayer reporting the interest paid so the taxpayer can properly report that information on Schedule B of their tax return. The impact of that $10 in interest is most likely a change of 0 to $4 in tax due or refund.

(Some financial institutions are extremely careful to report all interest to paid to taxpayers. I recently saw an end of year 1099-INT report a grand total of 17 cents in interest. The postage to send the 1099-INT cost more than the amount of interest in question! In case you are wondering, if a taxpayer's only interest is 17 cents, she is allowed to round to the nearest dollar and report $0 in taxable interest for the year.

By contrast, with the Economic Recovery Payments, we have a case where a public agency paid a taxpayer $250 to the taxpayer potentially, resulting in a $250 change in tax liability, but our government felt no need to bother to provide any kind of end of year statement to the taxpayers!

Given that some payments may have been misdirected and others may have been direct deposit payments easily confused with direct deposit payments from other sources, and that many ERP recipients are elderly, in poor health, and/or disabled, it seems the least the government could have done was to provide some way for taxpayers to check the amount of ERP that the government agency believes it paid them last year!

We had more than enough problems with the 2008 Economic Stimulus Payments (ESP) last year, but at least the IRS quickly provided the very helpful web tool "How much was my 2008 Stimulus Payment?" to allow taxpayers to look up the amount the IRS had sent them.

Unfortunately, the agencies that sent taxpayers the ERP money this year do not have any similar way for taxpayers to look up the amount of ERP money they received in 2009.

They just have to make their best guess and hope for the best. If they guess wrong and efile, the return will reject and the IRS will just tell them that the amount they reported on Schedule M does not agree with the IRS records obtained from the government agency that paid the money.

One professional preparer writing on the TaxWise forums have contacted Social Security on behalf of their bewildered taxpayers, only to be told that in some cases an Economic Recovery Payment paid to one person was mistakenly reported as accruing to the person's parent rather than to the child, for example.

Another preparer tried to report a $250 ERP payment made to a taxpayer after she showed him the bank account statement with a $250 direct deposit from Social Security, but the IRS records apparently show zero in ERP. There appears to be no way to efile the amount the preparer believes to be correct. The best the preparer can do is to efile the amount the IRS believes to be correct, resulting in a refund that will be $250 too large, but then after the taxpayer receives her refund, the preparer can prepare a paper return afterwards to correct the overpayment and return the money to the government.

What a fiasco! This is completely disgraceful.

If our government can require private financial institutions to give a clear accounting of tax information to their customers for amounts as small as $10 in interest paid (an amount that frequently has minimal tax liability consequences), why doesn't our government lead by example and tell its own public agencies, the Social Security and Veterans' Administration, to give a clear and easily accessible accounting to taxpayers of amounts those agencies paid which can change a taxpayer's liability or refund by $250!