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New tax breaks cause confusion, enforcement issues

New tax breaks enacted last year are causing confusion for taxpayers and enforcement problems for the Internal Revenue Service, according to a government report issued Thursday, the deadline for filing individual returns.

As of March 5, the IRS erroneously gave out $24.2 million in Making Work Pay tax credits, according to the report by J. Russell George, the Treasury inspector general for tax administration. The IRS issued a total of $25 billion worth of the credits during the period, for an error rate of less than one-tenth of 1 percent.

The IRS also erroneously issued about $4.7 million in tax credits meant for people who bought plug-in electric cars. The new tax breaks were enacted as part of the massive economic recovery package passed last year.

“Our report concludes that the IRS is having a mixed filing season this year,” George said. “On the one hand, they are having difficulty implementing many of the changes created by the passage of the laws designed to stimulate the economy. On the other hand, the news is not all bad as the IRS is detecting and stopping more erroneous refunds this year.”

The report covers returns processed as of March 5. At the time, the IRS had received about 61 million returns. The agency expects to receive about 140 million individual returns this year.

“Any time you have major tax changes you will see some confusion over it,” said IRS spokesman Terry Lemons. The IRS is doing “everything we can” to work through problems and process returns quickly.

The stimulus package enacted last year presented many challenges for taxpayers and the IRS, making an already complicated tax system even more complex. There were tax credits for qualified families who buy new homes or make energy improvements to existing ones, as well as tax breaks to help pay college tuition or buy new cars.

The Making Work Pay tax credit was President Barack Obama’s signature tax break in the package. It provides individuals with up to $400 and couples up to $800.

The homebuyer tax credit was so popular that Congress extended and expanded it in November. Buyers who have owned their current homes at least five years are eligible, subject to income limits, for tax credits of up to $6,500. First-time homebuyers — or people who haven’t owned homes in the previous three years — can get up to $8,000. To qualify, buyers have to sign purchase agreements before May 1 and close before July 1.

The IRS expects half the people claiming the homebuyer credit not to include proper documentation, such as a settlement statement, and that will delay refunds, according to the report.

As of April 2, the average refund was $2,950, up about $255 over last year, Lemons said. The fastest way to get a refund: file electronically and have the refund deposited directly into a bank account, which takes about 10 days.

Refunds can take six to eight weeks for last-minute filers who use paper returns and receive checks, Lemons said.

China Q2 growth quickens

uk.reuters.com

China Q2 growth quickens

BEIJING  – China’s economy gathered momentum in the second quarter thanks to massive fiscal and monetary stimulus, leaving the government’s full-year growth target of 8 percent within reach.

Annual gross domestic product growth accelerated in the second quarter to 7.9 percent, up from 6.1 percent in the first quarter, making China the best-performing major economy in the world. Economists polled by Reuters had forecast 7.5 percent.

A string of accompanying data for June from the National Bureau of Statistics depicted an economy successfully making up for a slump in exports through domestic demand, both investment and consumption, generated by a 4 trillion yuan (357 billion pound) pump-priming package and record bank lending.

“It’s very encouraging, the 8 percent growth target is in sight,” said Daniel Soh, economist at Forecast in Singapore.

“It’s by now clear that the fiscal stimulus package has offset the contraction in export activity.

The statistics office, however, offered a word of caution, saying a lasting recovery was not yet secure.

“The base for recovery is still weak. Growth momentum is unstable. The recovery pattern is unbalanced and thus there are still uncertain and volatile factors in the recovery process.”

Investment in fixed assets in urban areas grew 33.6 percent in the first half, up from 32.9 percent in the first five months, while industrial production growth quickened to 10.7 percent in the year to June from 8.9 percent in the 12 months to May and beating analysts’ forecast of 9.4 percent growth.

Retail sales, a rough proxy for consumption, rose 15.0 percent in June from a year earlier after May’s 15.2 percent increase.

Economists said the data gave Beijing every chance of achieving 8 percent growth for all of 2009 — the minimum deemed necessary to hold down unemployment, and the rate forecast by economists polled by Reuters last week.

Europe’s biggest bank, HSBC Holdings raised its 2009 growth forecast for China to 8.1 percent from 7.8 percent after the data. It also revised its 2010 forecast to 9.5 percent from 8.5 percent.

A few months ago, in the depths of the global recession, such strong growth appeared fanciful to many China-watchers.

Now, the central bank, nervous at the record pace of bank lending, has begun to tap gently on the monetary brakes, selling more of its paper to soak up cash and nudging up money market rates.

But economists believe the political imperative of putting growth on a solid footing is so great that the central bank will not threaten the recovery by raising interest rates any time soon.

Moreover, the depressed growth rates of late 2008 will offer an increasingly favourable base of comparison as this year wears on. As a result, GDP growth in the second half is likely to be higher than the 7.1 percent first-half rate reported on Thursday.

Unlike developed countries, China does not yet publish quarter-on-quarter GDP data, which give a better sense of current momentum than year-on-year growth rates.

But most banks produce their own estimates, and they show China building up a strong head of steam in the second quarter.

Goldman Sachs had forecast 7.8 percent second-quarter growth, which it said translated into 16 percent compared with the first quarter when expressed as a seasonally adjusted annualised rate.

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