Recent Developments in the Withholding Tax System

PAD-80-41: Published: Feb 27, 1980. Publicly Released: Mar 25, 1980.

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GAO was asked to update its 1977 report "Inequities in the Federal Withholding Tax System." Statistics on withholding that have become available since that report was prepared were collected, a recent Internal Revwnue Service (IRS) publication on the system was reviewed, and Treasury officials were interviewed.

The current review of the withholding system indicates that the Department of the Treasury and IRS have made efforts to educate employers and employees about the system and that the withholding tables are more accurate than in previous years. Despite this, overwithholding for 80 to 90 percent of the taxpayers subject to withholding has continued. A 1977 report concluded that continuous overwithholding was the deliberate choice of many taxpayers to claim fewer withholding exemptions allowances than they were entitled to claim. The withholding tables were revised effective January 1, 1979, to reflect legislative changes. However, because each allowance was increased to $1,000 and because the withholding rates are no longer reduced to allow for the general tax credit, anyone claiming too few withholding allowances will generally be overwithheld by a greater margin under the new tables than under the old ones. The Department of the Treasury sent notice with all refund checks of $200 or more to taxpayers in 1979 stating that overwithholding could be avoided by claiming the proper number of withholding allowances. Treasury officials believe that taxpayers do not seem very interested in reducing overwithholding, and that more extensive educational efforts might not be cost effective and could actually be counterproductive. A recommendation to survey employers on the methods they use to compute withholding and to study methods for expediting refunds to the unemployed had not been acted on by the Treasury.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Treasury should enclose copies of the Form W-4 with refund checks or include them in the Form 1040 package to make it easier for taxpayers to make withholding changes. IRS and the Treasury are urged to collect more data on the withholding system in operation, specifically by (1) collecting statistics from Employee's Withholding Allowance Certificates; (2) producing monthly statistics that show receipts of withheld income taxes separately from receipts of social security contributions; and (3) surveying taxpayers to find out why they think overpayment of the withholding tax is desirable, unlike the overpayment of other bills.

    Agency Affected:


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