Why Your Clients Will Owe More in 2019

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In a new report, the Government Accountability Office (GAO) says that even more taxpayers than originally thought will owe taxes in 2019.

What’s more is that according to an NPR report, more Americans will owe the IRS in April because their employers aren’t withholding enough from their paychecks. Based on simulations run by the Treasury Department, the GAO says taxes for 30 million Americans — 21 percent of taxpayers — are being underwithheld by their employers, meaning they are getting a larger check this year, but will owe at tax time in April.

According to the simulations, 73 percent of taxpayers will be overwithheld and receive a refund from the IRS. When the simulation was run as if there had been no change in the tax law, 18 percent of taxpayers, or about 27 million, would have experienced underwithholding and 76 percent would have been overwithheld.

Prior to 2018, the withholding allowance value was prescribed by law. Public Law 115-97, enacted in December 2017, gave Treasury the authority to set the value of a withholding allowance for 2018.

According to Treasury officials, the goals for choosing a withholding allowance value for 2018 included increasing accurate withholding (where taxpayers’ withholding matches their tax liability) and not increasing instances of underwithholding or overwithholding (where taxpayers’ withholding is less than or greater than their tax liability).

Treasury assessed how alternative values for the 2018 withholding allowance might affect taxpayers’ withholding and chose a value of $4,150, what the allowance value would have been under prior law. Treasury chose the $4,150 value because there was no other value it tested that better achieved Treasury’s goals, the report states.

Treasury and IRS officials described to the GAO how the withholding tables were updated, both before 2018 and for 2018. According to the officials, before 2018, IRS adjusted items such as the withholding allowance value and income tax brackets for inflation, as prescribed by law and attained Treasury approval before they were published. Treasury officials stated that for 2018, after choosing the withholding allowance value, the process for updating the withholding tables followed the process for a typical year.

Although Treasury and IRS described to the GAO the process for updating the withholding tables, there’s limited documentation of that process. For example, there is limited documentation of Treasury’s and IRS’s roles and responsibilities.

According to IRS officials, the IRS did not document the process to update the withholding tables because it was routine and straightforward. However, federal internal control standards require agencies to document responsibilities through policies.

Documenting the process for updating withholding tables will help Treasury and IRS ensure that it is implemented consistently in the future if, for example, staffers experienced in updating the tables were to leave Treasury and IRS.

Public Law 115-97—enacted in December 2017 and which we refer to in this report as the Tax Cuts and Jobs Act—made a number of changes that affect individual taxpayers beginning in 2018. For example, the Tax Cuts and Jobs Act made changes to deductions and credits, such as the state and local tax deduction and the Child Tax Credit, which may affect tax liability and withholding for a large number of taxpayers.

Prior to the Tax Cuts and Jobs Act, the portion of any employees’ pay that was excluded from withholding—that is, the employee’s total withholding allowance—was determined by multiplying the number of withholding allowances an employee claimed on Form W-4 by the amount of the personal exemption for that year. The personal exemption amount increased over time because it was statutorily indexed to inflation.

The Tax Cuts and Jobs Act set the personal exemption to zero for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.  The Tax Cuts and Jobs Act also gives Treasury the authority to determine a new withholding allowance structure based on certain statutory factors.

Generally, employers are required to withhold income taxes on employee pay, but employees can exclude part of their pay from withholding. Currently, the amount of an employee’s pay to be excluded from withholding is determined by multiplying the number of withholding allowances an employee claims by a set dollar value.

IRS guidance directs employees to claim withholding allowances that match their personal circumstances, such as any tax deductions they plan to take and tax credits they plan to claim when filing their tax returns. Employers then subtract excluded amounts from employees’ pay; the rest of the employees’ pay is subject to withholding.

Prior to 2018, the withholding allowance value was prescribed by law. Public Law 115-97, enacted in December 2017, gave Treasury the authority to set the value of a withholding allowance for 2018.

According to Treasury officials, Treasury’s goals for choosing a withholding allowance value for 2018 included increasing accurate withholding (where taxpayers’ withholding matches their tax liability) and not increasing instances of underwithholding or overwithholding (where taxpayers’ withholding is less than or greater than their tax liability, respectively).

So what does the GAO recommend? Treasury and the IRS should work with the IRS Commissioner to document roles and responsibilities for updating the tax withholding tables, such as in the Internal Revenue Manual.

Many taxpayers have preferences about the tax refund that they will receive or the balance they will have to pay when they file their tax returns. The tax withholding tables that Treasury and IRS update each year are an important tool that both employers and employees rely upon to form their expectations. This reliance underscores the importance of accurate withholding tables.

Although Treasury and IRS described to us the process for updating the withholding tables in a typical year and documented their analysis for new required decisions for 2018, there is currently no documentation of Treasury’s and IRS’s roles and responsibilities for annual updates.

Documenting roles and responsibilities for this annual process —which is consistent with federal standards for internal controls—would help Treasury and IRS adequately ensure that the process to update the withholding tables is consistently implemented.

About Terry Sheridan

Terry Sheridan

Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.

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