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IRS Simplifies W-4 Form, Will Not Impose Penalties

March 03, 1987|TOM REDBURN | Times Staff Writer

WASHINGTON — The Internal Revenue Service unveiled a simplified version of its W-4 income tax withholding form Monday and announced that it will not impose penalties for underwithholding on any taxpayer who fills out either new form by June 1.

The simpler two-page W-4A form, issued by the IRS in response to a storm of protest over the complexity of the earlier four-page version, is expected to be available by mid-April.

In a heavily attended news conference, IRS Commissioner Lawrence B. Gibbs defended the longer version as more accurate but acknowledged that the new form is expected to be more useful for many taxpayers.

'An Alternative'

"We misjudged the willingness and capacity of many taxpayers to handle the additional complexity it takes . . . to make withholding more accurately match tax liability," Gibbs said. "So, we went back to work to come up with an alternative."

The new work sheet is much easier to follow and it eliminates the intimidating full-page table designed for families in which both spouses work.

Taxpayers may choose either withholding form, because the earlier form will still be available to those seeking maximum accuracy.

Nearly Half Affected

Gibbs said that about 45 million individuals, or nearly half of all employed taxpayers, should be able to correctly adjust the amount of income tax withheld from their paychecks by just using the half-page work sheet on the front of the new form.

Those with large itemized deductions and two-earner families should do the additional calculations available on the back of the form.

The original W-4 form issued by the IRS for the first year of the new tax law is more advantageous chiefly for taxpayers with substantial income from non-wage sources such as rents or capital gains and those who take advantage of various business-related tax credits. Also, it allows high-income families with two wage earners to reduce excessive withholding and come close to matching their actual tax liability.

Reaction to the new form by IRS critics was cautiously positive.

A spokesman for Sen. David Pryor (D-Ark.), who earlier called the longer W-4 form "a disaster," said that the simplified work sheet is "more understandable. The calculations appear to be simpler, and it more clearly explains which sections each taxpayer should or should not fill out."

The new tax law requires every wage earner to file a new withholding form with his employer by Oct. 1. Submitting an updated W-4 is necessary to adapt taxpayers' withholding to tax code changes that include dramatically reduced rates, the elimination of several popular deductions and the nearly doubled value of personal exemptions.

80% Get Refund

The IRS said that last year about 80% of all taxpayers received a refund, averaging about $1,000. According to IRS calculations, those who use the new simplified form will, on average, receive a refund next year of about $475.

However, more than half of all taxpayers have delayed filing a new W-4 because of the confusion, which means that, in many cases, they have not been withholding as much as they should early in the year.

Gibbs promised not to impose an underwithholding penalty on any employee who submits a W-4 by June 1, although he said the IRS would make an exception for tax protesters and those who deliberately attempt to mislead the government. But taxpayers who fall short of minimum withholding requirements--90% of the tax due or an amount equal to the tax paid the previous year--will still have to pay interest on the amount underwithheld.

The controversy over the W-4 got the new tax law off to a poor start. As soon as the new withholding form began reaching employees early this year, it generated a furor among taxpayers, who feared a mistake would bring a $500 fine. That led to demands in Congress for a less befuddling approach.

Baker Wanted Changes

However, the IRS appeared to be digging in its heels against change until Treasury Secretary James A. Baker III told a congressional committee in January that he had been on vacation when the new form was submitted and that he thought there should be changes.

Gibbs said on NBC's "Today" program that Baker has seen the new form. "He has reviewed it. He has approved it," he said.

Unlike the IRS' first form, which received almost no screening, alternative versions of the new withholding sheet were tested by a consulting firm in 23 different sessions involving more than 200 taxpayers.

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