IRS Draft Withholding Form Seen as Confusing

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By Michael Baer

A recently released IRS draft of a key 2019 tax withholding form fails to account for several critical scenarios and contains an array of elements that are not clearly defined, Bloomberg Tax was told.

Form W-4, Employee’s Withholding Allowance Certificate, filed by employees with employers to direct necessary income taxes to be withheld from pay, is undergoing an overhaul for 2019 because the new tax law ( Pub. L. 115-97) eliminated personal exemptions from the tax code.

The draft Form W-4 includes new fields to report amounts from other jobs, additional nonwage income, anticipated itemized deduction amounts, and the value of potential tax credits.

The draft form does not make clear if employees are to use the new fields only for the highest paying job or that employees could leave the areas blank if they do not want to share that information with employers, said Mary B. Hevener, a partner with the law firm Morgan, Lewis & Bockius LLP.

The lack of clarity could result in employees inadvertantly reporting amounts in the new fields for the lower paying jobs in the household, which is not the intention of those fields, Hevener told Bloomberg Tax on June 11. Leaving the new fields blank for the highest earner also could result in no potential tax deductions applied against taxable wages for withholding purposes.

An 11-page draft of instructions provided some detail, such as noting that only the highest earner is supposed to use the new fields when filling out the W-4, but questions remain, Hevener said. For example, employees are asked to consider “if you have more than one job at the same time.” Hevener wondered if this could be construed to mean more than one job in the same year—what if a worker leaves and starts new jobs several times during the year?

Hevener, whose practice focuses on the tax treatment of employees and independent contractors, also said it was unclear if employees would possibly include nonwage income as an independent contractor on the draft W-4’s new Line 5 for additional nonwage income. The line emphasizes interest and dividends as reportable nonwage income. For those serving in the capacity of director for several company boards, such income is not generally subject to withholding. That raises the question: Should that be reported on the form?

Further, “a partner or contractor might have the highest paying job in the household,” Hevener said. The new fields are only for the highest earner, so the lower-paid employees in such a scenario have no ability to account for additional offset amounts on the form, she said.

The draft form eliminates the ability of married employees to instruct employers to withhold at the higher, single rate, Hevener said.

Statutory Requirements

Hevener said she was “bewildered by what IRS is trying to do” with the draft form and instructions. The draft instructions tell employers and employees that older Forms W-4, which use withholding allowances based on the now-eliminated personal exemption amounts, still may be applied. “The withholding tables and formulas are adjusted to take older Forms W-4 into account,” the instructions said.

Hevener questioned the authority of the Treasury Department and the IRS to take older Forms W-4 with withholding allowances into account for 2019 and later years.

For 2018, it was OK to “pretend” and continue to use and refer to withholding allowance amounts during the one-year period Congress gave the Treasury Secretary to fully implement the new law’s provisions, Hevener said. The draft instructions would allow the use of older provisions “like rent control for W-4s,” with the old requirements grandfathered in and withholding amounts set artificially low, she said.

Congress, however, “did not allow perpetual transition relief,” and withholding of taxes should be based only on the elevated standard deduction and the tax rate, Hevener said.

The likelihood of employees being convicted of perjury for failing to provide employers with correct Forms W-4 also are part of draft form’s requirements, Hevener said. Delaying withholding until the end of the year would be perfectly acceptable, she said, based on her reading of the draft instructions.

Before the IRS issued the draft W-4, employees were required to project for the year what was to be withheld and report the amount appropriately on the W-4. The draft form’s instructions take a different approach by instructing employees to include amounts they want to be considered for withholding purposes, Hevener said.

There is precedent for revising the draft form, said Hevener, who also has advised the American Payroll Association on employment tax matters. After the 1986 changes to the tax code, the IRS released a proposed seven-page Form W-4 that was withdrawn as too complicated and redone, she said.

To contact the reporter on this story: Michael Baer in Washington at mbaer@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

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