IRS Will Waive Penalties for ’87 Underwithholding

Americans who were confused by the new W-4 tax withholding forms and had too little in taxes withheld from their paychecks this year will not face late-payment penalties from the Internal Revenue Service, the agency’s commissioner announced Tuesday.

IRS Commissioner Lawrence B. Gibbs said that the penalties will be waived to help soften the problems of taxpayers, who, as a result of 1986’s landmark tax overhaul legislation, had to cope with complex withholding forms earlier this year and will receive different return forms as well.

“With so much at stake--public confidence, the credibility of tax reform, a smooth-running filing season--we want to be sure that we have covered all our bases, that significant numbers of taxpayers won’t be surprised come tax time,” Gibbs said.

He said that the penalties and interest will be waived only for underwithholding from a taxpayer’s wages. It will still be assessed against people who fail to make sufficient prepayments to cover income from interest, dividends, capital gains or other sources. Previously, taxpayers have been liable for interest and penalties when they failed to withhold at least 80% of the total income taxes they owed.

Gibbs said that the new lenient policy is expected to benefit about 1.3 million taxpayers, including the 10% who failed to file the new withholding forms by the Oct. 1 deadline.

It will cost the government about $86 million in lost penalty revenue, he estimated. However, he said, it is a reasonable step considering the taxpayer “confusion when we initially designed a correct but complicated W-4 form and then redesigned an easier, alternative form.”

The simpler W-4 form, which was introduced last spring after a wave of complaints about the complexity of the first version, should prevent a recurrence of problems next year, he said.

Gibbs said that the IRS has also decided not to collect penalties for taxpayers who failed to supply the Social Security numbers of their children over 5 years old--a new requirement in the tax code. That penalty now will not be phased in until 1988, he said.

Other IRS Steps

The agency, in attempting to reduce confusion in the reform package’s first tax season, is taking a number of other steps to ease the filing of the 106 million forms expected, the commissioner said.

A thousand operators are being added to the toll-free telephone lines that handle taxpayer questions, he said. The 4,500 tax counselors are expected to handle about 22 million calls next year, compared to 17.5 million in 1987. To monitor the accuracy and thoroughness of the responses, which came under sharp congressional criticism this year, the IRS will make 200 test phone calls a day to its operators.

“We have started earlier and done more to be ready for the coming filing season than we have ever done before,” Gibbs said.

Gibbs said that the nearly 98 million tax return forms that will be mailed after next Saturday will contain a number of changes from last year’s but are not more complicated. “The changes make the forms different, but not necessarily more difficult,” Gibbs said. “In short, the changes aren’t anything the average taxpayer can’t handle.”

Penalties to Be Resumed

As for the new withholding forms, IRS officials said that greater taxpayer familiarity with W-4 forms will justify resumption of the penalties for underwithholding in the 1988 tax year.

The tax overhaul law calls for penalties when a taxpayer fails to withhold 90% of his tax liability, but IRS officials said that that may be rolled back to the 80% level by congressional action.