The IRS is providing a new withholding adjustment option for pension plans as a way to get around some of the glitches that have developed with the new Making Work Pay tax credit.

In February, the IRS issued revised withholding tables incorporating the Making Work Pay credit, one of the key provisions of the American Recovery and Reinvestment Act. That change resulted in more take-home pay for over 120 million American households and provided an immediate economic stimulus, said the IRS.

However, the procedure for pensions that the IRS announced Thursday promises to make withholding more accurate for pension recipients, and, more important, allows pensioners to avoid facing a big tax bill next season. Some tax experts have warned that senior citizens, as well as younger taxpayers with second jobs, or whose spouses work, could face large tax bills or dramatically smaller refund checks as a result of the new withholding tables associated with the credit.

While the procedures announced by the IRS on Thursday apply only to pension payments, the IRS is gearing up for a wider outreach campaign to educate pensioners and other taxpayers about the new withholding tables and payments. The IRS said it would work with partner groups to provide taxpayers with information to make sure they have the appropriate withholding allowance for their situation. The IRS also plans to work on developing a variety of information products, including brochures, video and audio material, to help educate taxpayers.

The optional adjustment procedure, which may be used by those paying pensions, is available in Notice 1036-P, “Additional Withholding for Pensions for 2009.”  The online version of Publication 15-T, “New Wage Withholding and Advance Earned Income Credit Payment Tables,” will be updated and available next week, said the IRS.

Pension payors are not required to use this new procedure and may continue to use only the February 2009 withholding tables, the IRS noted. For plans that adopt the new procedure, withholding on pension payments will be automatically adjusted, with no action needed by pensioners.

The IRS is also encouraging pension payors who choose to implement the new withholding adjustment procedures to contact retirees who previously submitted a Form W-4P, “Withholding Certificate for Pension or Annuity Payments,” requesting additional withholding after the February withholding tables were issued.

Those who should pay particular attention to their withholding include married couples with two incomes, individuals with multiple jobs, dependents, some Social Security recipients who work, and workers who do not have valid Social Security numbers. “Depending on their personal situation, some people could have less money withheld from their paychecks than they need or want,” the IRS warned.

People who believe their current withholding is not appropriate for their personal situation can perform a quick check by using the IRS withholding calculator on IRS.gov. Any necessary adjustments can be made by filing a revised Form W-4, “Employee's Withholding Allowance Certificate,” with their employer.