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IRS encourages taxpayers, especially EITC and ACTC recipients, to review withholding

In a news release, IRS has encouraged taxpayers to review their withholding and aim to have the correct amount of their tax liability taken from their paychecks, and to examine whether any events have occurred that would warrant the filing of a new Form W-4 with their employers. IRS noted that having the correct amount withheld may be particularly important for certain taxpayers who claim the earned income tax credit (EITC) or the additional child tax credit (ACTC), as these taxpayers may face delays in receiving their refunds.

Background—withholding. Employers must withhold income tax from wages paid to employees, and employees may request additional income tax withholding on wages on Form W-4, Employee’s Withholding Allowance Certificate. Tax may also be withheld from certain other income, like pensions and gambling winnings.

When a taxpayer files his or her return, if the total tax paid exceeds that owed, this amount is generally refunded to the taxpayer (unless the taxpayer has outstanding tax obligations, elects to apply it towards the following tax year’s estimated tax, or a number of other specified alternatives). According to IRS, most refunds are issued in less than 21 days. (IR 2016-167) So far in 2017, IRS has issued more than 106 million tax refunds out of the 142 million total individual tax returns processed, with the average refund well over $2,700. (IR 2017-121)

Background—delayed refunds for returns claiming the EITC or ACTC. The EITC is a refundable credit available to low-income workers who satisfy certain requirements. Subject to income limitations, an individual may claim the child tax credit, for each qualifying child under the age of 17; to the extent the child credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (i.e., the ACTC).

The Protecting Americans from Tax Hikes (PATH) Act (P.L. 114-113), enacted late in 2015, amended Code Sec. 6402(m) to require IRS to hold the refund for any tax return claiming either the EITC or ACTC until Feb. 15 (i.e., the 15th day of the second month following the close of that tax year). This change went into effect for credits or refunds made after Dec. 31, 2016.

IRS reminder. In IR 2017-121, IRS encouraged taxpayers to consider checking their tax withholding, keeping in mind several factors that could affect potential refunds or taxes they may owe in 2018.

IRS noted that, during the year, changes sometimes occur in a taxpayer’s life, such as in their marital status, that impact exemptions, adjustments or credits that they will claim on their tax return. When this happens, they need to give their employer a new Form W-4 to reflect the change (e.g., by changing their withholding status or the number of allowances), and the employer uses the form to figure the amount of federal income tax to be withheld from pay. Making these changes in the late summer or early fall can give taxpayers enough time to adjust their withholdings before the tax year ends in December.

With respect to early filers who claim the EITC or ACTC and whose refunds are subject to additional processing time, IRS noted that the withholding review takes on even more significance. In addition, IRS and state tax administrators are now taking additional steps to strengthen protections against identity theft and refund fraud—so some tax returns could face longer review time next year.

With respect to self-employed taxpayers, including those in the so-called “sharing economy” (e.g., Uber drivers), the Form 1040-ES worksheet can be used to correctly figure their estimated tax payments. If they also work for an employer, they can often forgo making these quarterly payments by instead having more tax taken out of their pay.

References: For voluntary withholding agreements, see FTC 2d/FIN ¶  H-4475  et seq.; United States Tax Reporter ¶  34,014.15.

IR 2017-121

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