Giving the W-4 What For
The Internal Revenue Service promises that by March 1 it will try to have a revised and simpler W-4 tax-withholding form ready for distribution, this time--a roll of drums and a blare of trumpets, if you please--one that some people might even be able to understand. That’s the good news. The bad news is that simplification won’t help everyone. Taxpayers who file more complicated returns, including those with substantial outside income from which no tax has been withheld, would still be stuck with working their way through the infamous complexities of the original W-4 form that is now being distributed. And woe to those who err, for they could end up paying through the nose.
It is this prospect of possibly stiff penalties if taxes are underwithheld that has ignited a firestorm of congressional and popular protest. Under the new law, taxpayers must cover at least 90% of their 1987 tax liability by the end of this year or face stiff penalties. That threat is forcing some people to think about costly expedients. Some may choose to have their payroll taxes deliberately overwithheld, which would result in giving the Treasury an interest-free loan until tax-refund time rolls around next year. Others are hiring experts to figure out what they might owe. One member of the Senate Finance Committee noted the other day that a New York accounting firm is charging $500 just to fill out the worksheet for the new W-4 form.
IRS Commissioner Lawrence Gibbs says that taxpayers who make “sincere efforts” to fill out the W-4 forms accurately won’t be penalized if they make mistakes that result in underwithholding. But determining who has made “sincere efforts” would apparently be on a case-by-case basis, meaning inevitably that the mistakes that one IRS examiner might tolerate could well be rejected by another.
Gibbs suggests that a safe course would be for taxpayers to make sure that this year’s withholding at least matches last year’s. But if this year’s post-tax-cut withholding equals last year’s pre-tax-cut withholding, then the effect of the tax cut pretty much evaporates--at least until refunds are made. The Treasury would gain, but individuals--and the economy--would suffer.
The new W-4 was a bureaucratic attempt to make a single form applicable to taxpayers at every income level. It has proved to be a fiasco. Now partial rectification is under way. But a lot of taxpayers could still face the need to prove to the IRS’ satisfaction that they made a good-faith effort to comply with the law’s withholding requirements. That is too chancy a thing.
It’s hard to believe that the IRS can’t come up with some simple formula to apply to reportable non-payroll income that wouldn’t force taxpayers to overwithhold or that would leave them exposed to penalties should they underwithhold. Barring that, the IRS ought to forget about penalizing any taxpayer whose withholding comes reasonably close to the 1987 target range. To do otherwise, to hold taxpayers responsible for the incomprehensibility of the W-4 form, would be not only unfair but also absurd.
