Sounds like you did not enter the correct rebate amount from 2007 (the amount before any offsets). Any rebate calculated on your 2008 return is simply the amount you were entitled to in either 2007 or 2008 reduced by the credit received. Without knowing your specific situation, it’s very difficult to tell you what you should have been entitled to claim. However, generally it would have been $600 (single) or $1200 (joint) plus $300 for each child.
Just so you know, with over 30 million returns filed for 2007 and 2008, we are not aware of any calculation issue in this area. I would suggest you contact the IRS first to determine how they arrived at their number.
I hope this information helps.
Bob Meighan
VP, TurboTax

He later added:

I would suggest you send a letter to the IRS requesting abatement of the penalty. They are generally pretty good about eliminating the penalty when it’s for a reasonable cause. Use language like “I respectfully request abatement of the penalty because…”
… I can confidently say there is not a calculation error with the rebate. I encourage you to call the IRS to find out how they arrived at their number and then compare it what you may have entered. In every case that I’ve seen, it’s been a case where the user entered the incorrect rebate received from the prior year.

(Interestingly enough, this isn’t the first time Meighan has gotten involved in online discussions of Turbotax.)

But what’s really going on is this: the stimulus plan has created a very confusing situation for the average taxpayer. If they missed the stimulus one year, they could get it the next — and tax software has to take that into account. Unfortunately, there’s no easy way to set this up. TurboTax keeps track of every user’s expected refund (or expected amount owed), and had to assume either that taxpayers would get a stimulus payment (so when they said they wouldn’t, their expected refund would drop painfully), or assume that they wouldn’t (so taxpayers expecting a stimulus payment would think they owed more money for a while.

The users may be partly to blame — most people were able to figure out how to file. On the other hand, people using different tax filing software were able to file weith less confusion and fewer mistakes. Hopefully, they’ll catch any confusing issues like this by next year’s tax season

Tax Blog Roundup: The Recovery Rebate and Turbotax

• Kay Bell at Don’t Mess With Taxes publicized the story in her Tax Carnival post.

• The Sun’s Financial Diary has a first-person account, and the comments have more.

• The TurboTax blog announced the Recovery Rebate feature back in December.

• TaxGirl has a reader who ran into a similar issue, but caught it before the IRS started asking for fines.

• The Wandering Tax Pro suggests double-checking Turbotax through a calculator on the IRS website. (The correct link is here.)

Forum posts asking about the Recovery Rebate and Turbotax

• “PennyLane” gets different numbers from TaxAct and TurboTax.

• “dirtyinjersey” is extremely confused by how TurboTax does the math (and one one user’s response claims that “The IRS is verifying every return due to the screwups. 1 in 6 tax returns made a mistake on this line alone.”)

• “Susan” asks, and a TurboTax representative answers.

• “Judy” explains that other tax preparation programs have the same issue.

• Reddit.com user “Popperian” got a letter from the IRS — that blamed the IRS!: “Apparently TurboTax was following the law and one-upped the I.R.S. who had screwed up some of it’s formulas… The I.R.S., of course, didn’t admit the error, just stated “the existence of an error” on the letter, ROFL.”

The IOUs can be redeemed at face value, plus 3.75% interest, by Oct. 2 or earlier if a budget deal is signed and the state has enough cash to cover them. Some banks and at least 25 credit unions have agreed to accept the IOUs. Bank of America, Chase, Citi and Wells Fargo have said they would accept the paper through July 10.

In other words, you can treat the IOUs more or less like an actual dollar payment — the banks will accept them, and California will eventually pay them back (or default on the rest of its debt).

This is expensive and inconvenient to the average taxpayer. Instead of borrowing a few billion dollars at a time from people who want to lend money, the state is borrowing a few hundred dollars at a time from people who want cash. The IOU trick gives them some breathing room, though, and presents the possibility that California can coast into an economic recovery without gong bankrupt first.

California Warrants Blog Post Roundup

• Joe Weisenthal at Clusterstock agrees that California has invented its own currency.

• Kay Bell of Don’t Mess With Taxes tells taxpayers what to do, with specific advice on everything from how to deposit them to what to do if you can’t.

• BuyMyIOU.com is exactly what it sounds like. (But caveat emptor — the site doesn’t exactly look professional.)

• Months ago, Taxrascal suggested that state IOUs aren’t so bad. Perhaps California’s treasurer read it!