Taxpayers' heightened IRS penalty risk may continue through 2020

By Personal FinanceFOXBusiness

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Former Sen. Joe Lieberman, (I-Ct.), on the tax reform legislation, the U.S. economy and the Federal Reserve.

The Internal Revenue Service will not release an updated W-4 form to go along with the new tax law until 2020, the Treasury Department announced on Thursday, which means taxpayers may continue to be at a heightened risk of owing a year-end tax penalty.

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“Launching the redesigned form in 2020 will allow the Treasury and the IRS to properly implement changes to the withholding system and ensure taxpayers have a positive and simplified experience,” Treasury Secretary Steven Mnuchin said in a statement.

For the 2019 tax season, the IRS said it will continue to use a form similar to the current W-4, which has resulted in some issues for taxpayers.

This year, employers are using W-4 forms already on file to calculate withholding amounts, which is problematic because the sweeping tax reform law changed everything from personal exemptions to the standard deduction. The Tax Cuts and Jobs Act gave the Treasury Department authority to determine the withholding allowance structure because the old method was no longer suitable, and there was not enough time to issue a new W-4.

According to a simulation conducted by the Government Accountability Office (GAO) in August, which reviewed the revised federal tax withholding tables for 2018 implemented by the IRS and the Treasury Department, 21 percent of workers are at risk of having their taxes underwithheld – 3 million more than projections based on the old tax code. These individuals will be stuck with a bill instead of a refund check come April.

Only 6 percent of taxpayers are expected to have wages accurately withheld, while 73 percent are likely to have their taxes overwithheld. The former is three percentage points less than a simulation conducted using the same withholding structure and the old tax code. Accurate withholding was assumed to be within $100 of what is truly owed.

The IRS did say on Thursday that it would be implementing changes to the form in order to make the system more accurate and more transparent.

When asked in February about how many errors the Treasury has seen so far this year, Treasury Secretary Steven Mnuchin declined to comment directly, instead urging taxpayers to use the IRS withholding calculator.

Employees can update their withholding amounts and the administration has encouraged them to use the tax calculator, available on the IRS website. The IRS recently urged older Americans to check how much was being withheld from their monthly pension and annuity checks in order to avoid a penalty next year, as part of an ongoing awareness campaign.