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About 13.4 million taxpayers may be getting unexpected tax bills because they were awarded too much money under President Barack Obama's Making Work Pay tax credit, a government audit said Thursday.

The tax credit, which expires Jan. 1, was designed to increase take-home pay by about $8 a week through new tax withholding tables. The credit was capped at $400 for individuals and $800 for married couples filing jointly.

However, the credit put millions of taxpayers at risk for not having enough taxes withheld from their paychecks, resulting in a tax bill when they file their returns, said the audit by J. Russell George, the Treasury inspector general for tax administration.

Those at risk included people with multiple jobs, married couples who both work, Social Security recipients who also work, and young workers who are also claimed as dependents on their parents' tax returns.

"The Making Work Pay credit is a key tax credit designed to increase spending and stimulate the economy," George said. "However, many taxpayers who are accustomed to receiving refunds when they file their tax returns may have owed taxes and incurred penalties in 2009, and may yet again in 2010, because they were advanced more of the credit than they were entitled to claim."

The Internal Revenue Service reported that the average tax refund was $2,892 in the 2010 filing season, up from $2,663 in 2009. However, the number of refunds dropped by 3.5 percent, to 93.3 million.

The audit says the Making Work Pay credit could have been a factor in the reduced number of refunds.

The credit was Obama's signature tax break in the massive economic recovery package passed in 2009. The IRS moved quickly to start getting the new tax credit to workers, issuing new tax withholding tables four days after Obama signed the law.

About 122 million families and individuals have benefited from the credit, according to the agency's written response to the audit.

The IRS says it undertook an aggressive campaign in 2009 and 2010 to warn at-risk taxpayers that they might not be withholding enough money from their pay, including public service announcements and YouTube videos.

The agency regularly advises taxpayers to check their withholding so they don't get a surprise tax bill when they file their returns.

"This provision was specifically intended to help taxpayers through the severe economic downturn by putting more money into their hands right away, in each paycheck," wrote Richard Byrd, commissioner of the agency's wage and investment division.

 

Attorneys for 20 states fighting the new federal health care law told a judge Thursday it will expand the government's powers in dangerous and unintended ways. The states want U.S. District Judge Roger Vinson to issue a summary judgment throwing out the health care law without a full trial. They argue it violates people's rights by forcing them to buy health insurance by 2014 or face penalties.

"The act would leave more constitutional damage in its wake than any other statute in our history," David Rivkin, an attorney for the states, told Vinson.

President Barack Obama's administration counters that Americans should not be allowed to opt out of the overhaul because everyone requires medical care. Government attorneys say the states do not have standing to challenge the law and want the case dismissed.

Vinson, who was appointed to the bench almost 30 years ago by President Ronald Reagan, heard arguments Thursday but said he will rule later.

In a separate case, U.S. District Judge Henry E. Hudson earlier this week became the first federal judge to strike down a key portion of the law when he sided with the state of Virginia and ruled the insurance requirement unconstitutional. That case is likely to go to the U.S. Supreme Court. Two other federal judges have upheld the insurance requirement.

In Florida, Vinson questioned how the government could halt the massive changes to the nation's health care system that have already begun. Rivkin told him the constitutional violations are more important.

The judge questioned the Obama administration attorneys about whether the government is reaching beyond its power to regulate interstate commerce by requiring citizens to purchase health insurance or face tax penalties.

"A lot of people, myself included for years, have no health insurance," said Vinson, who described being a law student and paying cash to the doctor who delivered his first child.

"It amounted to about $100 a pound," he said, laughing.

Vinson also grilled government lawyers about their contention that people can be required to have health insurance because everyone needs medical care. Under that logic, he said, Americans could be forced to wear shoes or buy groceries or clothes.

But administration attorney Ian Heath Gershengorn said health insurance is different because it covers catastrophic injuries and chronic diseases.

"Those costs, when they come, are unpredictable and substantial," he said.

Gershengorn also defended the administration against the states' claim that it was coercing them into participating in the health care overhaul. The states say the have no choice but to go along with the federal program because billions in Medicaid dollars are at stake.

Gershengorn said the states see huge benefits from Medicaid and the federal government is covering the bulk of the health care overhaul costs.

The other states involved in the lawsuit are Alabama, Alaska, Arizona, Colorado, Georgia, Indiana, Idaho, Louisiana, Michigan, Mississippi, Nebraska, Nevada, North Dakota, Pennsylvania, South Carolina, South Dakota, Texas, Utah and Washington.