Baker Orders IRS to Simplify New W-4 Form

Treasury Secretary James A. Baker III on Thursday ordered the Internal Revenue Service to explore ways to revise the new W-4 tax withholding form, which has generated a blizzard of complaints from taxpayers and lawmakers over its complexity.

“I have asked that there be a review,” Baker said in testimony to the House Budget Committee. “We’re going to take another look at the W-4 and see if we can’t come up with a better form.”

However, Baker and other Treasury officials cautioned that a revised form is not a certainty and may not be available for months. Thus, Baker said, taxpayers should proceed with completing the current form and should do so as soon as possible “to avoid a lot of unpleasant surprises down the road.”

Taxpayers who put off completing the form could wind up owing substantial income taxes next year and could face additional interest and penalties if withholdings and estimated-tax payments do not equal at least 90% of the tax owed or 100% of the previous year’s tax liability. Because of the sweeping changes resulting from the new tax code, every employee in the country--more than 100 million people--must file a new W-4 form by Oct. 1.

The IRS developed the new form in an effort to ensure that withholding allowances more closely reflect actual circumstances. But because of the form’s complexity, many taxpayers may end up with amounts withheld that are more in error than before, critics say.

The new form has the same basic seven-line section found on the old form. But, including instructions, the new form runs four pages, twice the size of the old form. Taxpayers with large deductions or other complex tax situations are asked to complete a complicated work sheet that requires detailed estimates of expected deductions, tax credits and other items.

“Nobody we’ve dealt with even understands the first page, much less the work sheet which is on Page 3,” said Steven H. Brown, a Woodland Hills accountant. He said that even he tried to calculate his own withholding on the form but gave up because it would take too long.

‘Confusion So Great’

At H&R; Block, the nation’s largest tax-preparing firm, “the interest level has been so high and the confusion so great” that the firm recently decided to extend to Feb. 1 from Jan. 20 an offer to provide free assistance in preparing W-4s, said Steven R. Dickey, the company’s director of marketing.

Some of the calculations require a detailed knowledge of the new tax laws that most people cannot be expected to have, said John H. Mullen, partner in charge of the Irvine office of the accounting firm of KMG Main Hurdman. Mullen said one of his clients, an Orange County executive and former accountant, needed two hours to complete the new form.

Others, however, have simply given up trying to complete the work sheet and instead are adopting their own short-cut estimates.

“People seem to be coping with it, but not in the way that the IRS intended,” said Gale L. Case, a Los Angeles accountant. “It remains to be seen whether the amounts they come up with will be correct.”

Estimates of Tax

Case cited one Los Angeles law firm where attorney employees are simply estimating the tax each thinks should be withheld. They then consult with their payroll expert to determine the number of withholding allowances that corresponds to that amount of tax.

Others, Case said, are just estimating withholding allowances based on what they claimed on the old form, even though the number of allowances claimed on previous W-4s is not likely to be correct for 1987, particularly for those who have large itemized deductions. That is because the new tax law reduces or eliminates several deductions, cuts tax rates and boosts the value of each personal exemption.

Most taxpayers received additional money in their paychecks this month, in part reflecting the expectation that many people will receive a tax cut this year. But for those who do not quickly file a new W-4, the IRS is relying on a withholding table that is likely to leave many taxpayers coming up short on April 15, 1988.

New calculations will also be required in 1988 to reflect tax changes scheduled to go into effect next year.

Last week, Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, said the form should be withdrawn and simplified.

“Although I recognize that the IRS was working under a mandate from Congress to devise a more accurate form, our goals will not be realized if workers are unable to decipher the form because of its complexity,” Bentsen wrote in a letter to IRS Commissioner Laurence B. Gibbs.