On July 31, the U.S. Government Accountability Office (GAO) released a report projecting that 21%, or nearly 30 million, taxpayers are having too little tax withheld for 2018. These taxpayers may have a balance due when they file their tax returns and could be subject to a penalty for underpayment of tax [GAO-18-548, Federal Tax Withholding: Treasury and IRS Should Document the Roles and Responsibilities for Updating Annual Withholding Tables, 7-31-18].
Underwithholding to Increase
Treasury and IRS officials told GAO that prior to the implementation of the Tax Cuts and Jobs Act (TCJA; Pub. L. 115-97), the process for updating the withholding tables was routine. However, the TCJA gave Treasury the discretion to set withholding rules for 2018. To ensure the withholding tables would be compatible with existing Forms W-4 and to promote accurate withholding, Treasury established $4,150 as the value for one withholding allowance.
The GAO report includes Treasury’s simulation of the changes in the percentages of taxpayers with wage income who will be overwithheld or underwithheld. The simulation was based on the withholding allowance set at $4,150 and considered withholding within $100 of tax liability to be accurate. Treasury ran two simulations – with and without the TCJA changes. Under both scenarios, Treasury projected that 6% of taxpayers would have accurate withholding. Under the TCJA, Treasury projected that 73% of taxpayers would be overwithheld, a decrease from 76% under the pre-TCJA simulation. The simulation projected that 21% of taxpayers would be underwithheld due to the TCJA, which is 3% higher than the projection under the pre-TCJA simulation.
GAO Recommendations
After analyzing implementation of the 2018 withholding tables, the GAO recommended that the Secretary of the Treasury work with the IRS Commissioner to document roles and responsibilities for updating the withholding tables. Treasury and the IRS agreed to the recommendation.