IRS Urges Tax Professionals to Use Caution in Explaining Form W-4 Changes to Clients

The IRS has issued some guidance to tax professionals on how to explain Form W-4 changes to clients [IRS e-News for Tax Professionals, Issue 2019-47, IRS Urges Careful Communication of Form W-4 Process, 12/20/19].

Form W-4 has been completely revised beginning with the 2020 tax year (see New 2020 Form W-4 Issued). The previous version of Form W-4 calculated a taxpayer’s income tax withholding using a withholding allowance based on the personal exemption amount. In 2017, the Tax Cuts and Jobs Act (TCJA) suspended personal exemptions and substantially increased the standard deduction. The mismatch between the old Form W-4 and the new tax law caused some taxpayers to be over- or under-withheld.

Beginning in 2020, there is the following five-step process for completing Form W-4:

  • Step 1. Employees enter personal information such as full name, Social Security Number, and filing status.
  • Step 2. Employees provide information for households where one person has multiple jobs or a spouse works.
  • Step 3. Employees complete this step if they would like to claim dependents and to determine the amount of the child tax credit and the credit for other dependents that they may be able to claim when they file their personal income tax return.
  • Step 4. Employees enter other income (not from jobs), and deductions other than the standard deduction here (previously, entered on a “Deductions, Adjustments, and Other Income” worksheet).
  • Step 5. Employees sign and submit the form.

The IRS notes on page 1 of Form W-4 that employees complete Steps 2-4 ONLY if they apply; otherwise, they skip to Step 5.

New guidance. The IRS is strongly urging tax professionals in any communications and product distributions to clients, that they rely on the updated and final versions of the form rather than earlier drafts. The IRS also points out that it is not accurate to say that Steps 2 through 4 are optional. While everyone must complete Steps 1 and 5, taxpayers are to complete Steps 2 through 4 only if they apply to their situation. Thus, any of the steps that do not apply to the taxpayer’s situation should be skipped. However, neither the form nor the instructions state that taxpayers with multiple jobs may treat Step 2 as optional; the only step that is explicitly optional is Step 4.