Senate Democrats accuse Treasury of manipulating withholding tables to produce ‘phantom windfall’

Senate Democrats are accusing the Trump administration of hastily redoing the tax withholding tables last year, harming taxpayers and causing them to owe taxes this year.

“If the Administration had simply left withholding tables untouched, most taxpayers would have had the proper amount of taxes withheld from their pay,” Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, and Senate Minority Leader Chuck Schumer, D-N.Y., along with other 38 other Senate Democrats, wrote in a letter Friday to Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Rettig. “Instead, it seems to us, the Administration promised households a huge tax cut and so reduced withholding last year to appear to make good on that promise — at the price of a 2019 tax filing season in which tens of millions of taxpayers discover they are underwithheld for 2018 and have to pay back the phantom windfall to the IRS.”

Last July, the Government Accountability Office issued a report estimating that 21 percent of taxpayers, or approximately 30 million people, weren’t withholding enough taxes from their paychecks after the passage of the tax law.

The senators urged the IRS not to penalize taxpayers who did not have enough taxes withheld from their paychecks last year. In response to a letter last month from Wyden, the IRS did agree to waive penalties for taxpayers who paid at least 85 percent of what they would have owed, down from the usual requirement of paying at least 90 percent of what they owed, but the Senate Democrats urged them to go further.

“It is incumbent on the Trump administration and the IRS to waive tax penalties incurred as a result of the Administration’s actions,” said Schumer in a statement.

He and the other Democrats pointed to a letter from the American Institute of CPAs last month suggesting the IRS waive penalties for taxpayers who paid 80 percent of what they owed in 2018 or 2017 instead of 85 percent (see AICPA wants more penalty relief for underpayments and late payments by taxpayers). The AICPA pointed out that “the adjusted withholding tables did not account for factors such as the elimination of the personal and dependency exemptions or reduced itemized deductions” and that taxpayers may have underwithheld as a result.

The payroll giant ADP has noticed similar trends in withholding patterns, seeing no real difference between the number of taxpayers who changed their withholdings last year in comparison to 2017. “We did a comparison, essentially asking the question of given the tax reform act in 2017 was so comprehensive and fairly complex, did taxpayers generally respond appropriately by revising their Forms W-4 to perhaps reduce the number of withholding allowances, because among other things, they eliminated the personal exemptions,” said ADP Head of Government Relations Pete Isberg. “You might expect the taxpayers to learn about that and kind of turn around and go back to their employer and say, ‘I’d better go ahead and file a new Form W-4, removing my withholding allowances associated with the personal exemptions.’ What we found, though, is that they generally did not do that. There was virtually no change in the percentages of people who elected one or two or three withholding allowances. It was pretty much unchanged in September 2017 versus September 2018, which I thought was a surprise.”

Isberg anticipates many more taxpayers will make changes to their withholdings after seeing their refunds this tax season. “I suspect that most employees if they continue with the same employer year after year, what might cause them to go in and make a change to their Form W-4 is not just the tax reform act, but if their tax return gave them a little bit of a surprise and if they got less of a refund than they expected, or maybe they even owed money and they never owed money before, that’s what prompts people to come and make a change to their Form W-4,” he said.

The Senate Democrats stressed that they aren’t seeking penalty relief for taxpayers who purposely understated their incomes or otherwise tried to dodge taxes. “However, we would like to work with the Administration and the IRS to spare working families the additional injury of tax penalties when they discover the claim of huge tax refunds was too good to be true,” they wrote.

Wyden went further than the letter and accused the Trump administration of “goosing people’s paychecks” in an election year.

“It looks like the Trump Treasury Department spent 2018, an election year, goosing people’s paychecks by under-withholding, and it should have been obvious that the bill would come due eventually,” Wyden said in a statement accompanying the letter. “The Trump administration might want to push responsibility for this issue onto taxpayers, but it’s unreasonable to expect working people with busy lives to start the year out by crunching the numbers on their tax withholding with the rigor of a workaholic CPA. This threat that families will face surprise tax bills and penalty fees is another perfect example of how the Trump tax law is unfair to typical Americans. Corporations and the billionaires got huge handouts from the Trump tax law, and working people got a new source of financial anxiety. The Treasury Department needs to waive these penalties for those who underpaid by no fault of their own.”

Wyden’s Republican counterpart, Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, defended the tax law and claimed the accusations about the tax refunds were overblown. In a blog post on Medium in the form of a Q&A about tax refunds, Grassley said, “When Congress adopted the landmark tax law, the Washington-knows-best believers deployed divisive rhetoric and class warfare to oppose the tax cuts. The big spenders wanted to keep more money in Washington to grow big government programs. Their efforts to derail tax relief failed. With tax season in full swing, they are back in the batter’s box, swinging away to bash the tax cuts. This time they are bending the facts to fit their agenda. Once again, they are striking out at the plate.”

Zach Gibson/Bloomberg

Grassley accused critics of distorting the early filing season statistics from the IRS indicating the average tax refund amount declined over 8 percent. “Using a smidgen of IRS data from just the first week of filing season, critics are trying to use the statistics to show that Americans were paying more in taxes, not less,” he said. “Despite their quest to score political points, they are grounding out with basic misinformation. They claim that a lower refund from the IRS proves that taxpayers are paying more in taxes. This argument fails to acknowledge what a tax refund means. Taxpayers who receive a tax refund have overpaid what they owe the IRS in the first place. Getting a refund means taxpayers take home less pay from each paycheck throughout the year. Instead, more of their hard-earned money is deposited directly into Uncle Sam’s piggy bank. Now, critics of the tax cuts are squealing that lower refunds means that taxpayers are paying more in taxes. That argument is pure hogwash. Policymakers ought to know that is intellectually dishonest. What’s really happening is they are trying every which way to Sunday to sabotage the Tax Cuts and Jobs Act. This line of rhetoric is misleading and flat out wrong. Taxpayers who receive a refund have overpaid what they owe in the first place.”

Separately last Friday, Rep. Judy Chu, D-Calif., reintroduced the Taxpayer Penalty Protection Act, a bill that would shield taxpayers from withholding penalties for the 2018 filing year if they find out they have under-withheld due to the changes in the new tax law.

Last week, Chu and House Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga., also sent a letter to Mnuchin and Rettig asking for additional relief for taxpayers who unintentionally underwithheld their income taxes in 2018.

“As tax filing season begins, I have been hearing from constituents shocked to discover they owe the government money, especially when they were expecting a refund as in past years,” Chu said in a statement. “This is through no fault of their own, as many relied on the IRS’s updated withholding tables to ensure they paid their tax liabilities. There is no reason that complying taxpayers should face penalties because the GOP tax law was so rushed that the rest of the country was left without time to understand its implications. The IRS has acknowledged that under-withholding will be an issue this year, which is why they announced that they would provide limited relief for taxpayers. However, after hearing from constituents, accountants and other experts, it is clear that more relief is needed. That is why I’m reintroducing the Taxpayer Penalty Protection Act today, which will shield more taxpayers from an unexpected bill as they file this year.” The Taxpayer Penalty Protection Act has been endorsed by the AICPA.