TAP 03-016

W-4 Clarification

Statement of Issue:

When filling out a Form W-4, Employee's Withholding Allowance Certificate, to determine the proper amount of tax withholding from wages, taxpayers carefully indicate the number of withholding allowances that pertain to their situation. The Treasury Department developed the numbers to accommodate broad ranges of income because more accurate calculations would greatly complicate the form. For policy reasons, there is a small, inherent bias toward under-withholding on the form itself. Consequently, a taxpayer can complete the form accurately and still owe several hundred dollars at the end of the year. Many taxpayers don't like such an inaccurate system

Proposal:

Taxpayers should be referred to the Withholding Calculator available on the IRS website as well as to the Publication 919 for accurate withholding.

Additional advice needs to be given in the instructions whenever IRS is discussing the correct amount of withholding. Possible wording could include:

• "Check the amount that you are having withheld several times during the year."
• "If you owed money last year, make sure you change your withholding."
• "If you change jobs or start a second job, check your withholding."
• "When determining your withholding, please consider ALL of your income from ALL sources."

Response Notes:

The response provided historical background on the W-4 Form and the withholding rate schedules. Includng the purpose of the form: "The longstanding purpose of the instructions to the Form W-4 has been to provide employees with a simplified way of adjusting their withholding for deviations from the hypothetical situation that underlies the withholding rate schedules, that is, a worker earning all of his or her income ratably over the course of a year from a single job. These deviations include, but are not limited to, the worker's itemized deductions, statutory adjustments, tax credits, and head of household filing status, " and the requirements of the form "In short, the instructions for Form W-4 represent a careful balancing between accuracy and complexity. While longer and more complicated instructions would undoubtedly lead to more accurate withholding, they would do so only if widely used. Experience - especially the experience with a four-page Form W-4 with more accurate instructions issued in 1987 under a Congressional mandate - strongly suggests that longer, more complex instructions would not be widely used and might even be counterproductive and lead to further increases in the deviations between withholding and tax liability." The response also talked about the space restrictions on the current form and stated consideratio would be given to changing the wording as suggested as space permits.