The National Association of Enrolled Agents has written a letter to the Internal Revenue Service strongly criticizing the draft version of the new Form W-4, the Employee’s Withholding Allowance Certificate, saying it raises privacy concerns and creates a “substantial risk of underwithholding.”
In a letter last week to IRS acting commissioner David Kautter, the NAEA president Jean Nelsen warned that the new form, which the IRS substantially redesigned in response to the Tax Cuts and Jobs Act, would unnecessarily increase the burden on both taxpayers and employers. She noted that the instructions and the accompanying worksheets total 11 pages and are too long and complicated. To prepare the new Form W-4, taxpayers are directed to reference up to 12 other publications and forms, including Publications 524, 970, 968, 514, 590, 530, 502, and 5120 and Forms 3800, 8834, 8801, and 8859, she noted.
“Gone from the new form is any semblance of the time-tested technique of counting noses in a family and using that number as the first stab at proper withholding,” Nelsen wrote. “Moving away from this use of exemptions requires calculations and estimates better left to the annual tax return. Because the form itself contemplates basic one-line answers, taxpayers are expected to wade through 11 additional pages of instructions and worksheets to fill in these blanks.”
Taxpayers are asked to forecast a number of tax-related items that are traditionally difficult to forecast, such as contributions to tax-deferred retirement plans, scholarship and grant taxability, work-related child and dependent care expenses, tax year wages and bonus, medical and dental expenses, property taxes and mortgage interest.
“Contributions to tax-deferred retirement plans and other non-taxable portions of compensation are often not evenly distributed throughout the year and often unknown at the beginning of the year,” said Nelsen. “Scholarship and grant taxability is often unknown until the end of the tax year. Work-related child and dependent care expenses can vary wildly between any two tax years. Few are able to calculate accurately bonuses and wage increase s— aside from the wisdom of telegraphing to an employer both of those estimates.”
The new form requires taxpayers to calculate the value of tax credits and shifts significant new burdens to employers, Nelsen warned.
“Under the new tax code, credits will be playing a much more prominent role in many taxpayers’ lives,” she wrote. “Over- or underestimating these credits will cause wild swings in withholding, resulting in serious inaccuracies in many employees’ withholding amounts. Asking taxpayers to simply provide a number for the allowable credits and referring them to a worksheet and complicated instructions will likely result in workers ignoring this line — at their own peril. Equally concerning, taxpayers are able to enter on line 7 their tax credits, for instance education credits. Some taxpayers won’t know the credits to which they are potentially entitled. Others won’t understand whether they in fact qualify for a credit they are ‘claiming’ on the Form W-4.”
The new form would also shift the onus to employers in calculating the proper withholding amounts. “Smaller businesses generally lack HR resources and tax code knowledge, and the level of burden in this space will be particularly acute, increasing the need to contract with external payroll services,” said Nelsen.
She also pointed to privacy concerns. “Disclosing unrelated sources of income, such as a side job or small home-based business, could infer a lack of commitment to the employer,” she wrote. “Similarly, disclosure of a spouse’s income could persuade the employer to not consider wage or salary increases for the employee. This may be the one example of when a separate worksheet — privy only to the worker — providing an exemption number or numbers could help prevent awkward privacy issues from arising.”
NAEA executive vice president Robert Kerr explained some of the problems with that approach. “If I’m revealing my spouse’s wages, I don’t think that’s to my advantage,” he told Accounting Today in a phone interview. “Then one of the things you have to calculate is your bonus and wages. So I’m going to tell my employer what I think my wages for the year are going to be, or what my bonus is going to be? A number of employers aren’t going to take very kindly to their employees predicting what their raises are going to be for this year.”
The NAEA also warned of underwithholding risks with the online calculator provided by the IRS. “The calculator is particularly unreliable for employees with multiple jobs and/or varying other income (earned or passive) according to IRS’s own admission in a recent education webinar,” Nelsen wrote in the NAEA letter to the IRS. “The instructions for the revised Form W-4 state that more complex situations should use the online withholding calculator, but the calculator conspicuously lacks the ability to account for complex situations. A taxpayer who makes estimated tax payments because of investment income or self-employment is but one example. We wonder if IRS has created a calculator predicated on the concept that all tax should be paid through wage withholding. That approach does not work for married couples in which one spouse is an employee and the other self-employed, paying his/her taxes using quarterly estimated tax payments.”
She pointed out that a taxpayer who uses the link to the Spanish version of the Form W-4 withholding calculator is taken to a page identical to the English version instead of a Spanish version of the calculator.
The NAEA recommended the IRS move back to a design that assigns “points” or exemptions based on questions answerable by the average worker. “This system should err in favor of over-withholding to avoid penalties and unexpected balances due,” said Nelsen. “Further, the form cannot require numerous — with a stress on numerous — and complex worksheets. We also recommend the agency find a solution that provides balanced withholding between spouses, instead of weighting withholding toward the higher income spouse. Finally, the online withholding calculator should follow an interview format similar to private sector software, relying as much as feasible on plain language questions with short explanations when necessary.”