The IRS is facing its first big challenge implementing the new tax law: deciding how much in taxes to withhold from millions of Americans’ paychecks.

The agency is under pressure to take as little as possible so people will see big increases in their take-home pay ahead of this year’s midterm elections.


But that would come at a cost: smaller or even nonexistent refunds next year, though millions rely on them to plug holes in their family budgets. Democrats are already accusing the Trump administration of plotting "phantom windfalls" ahead of the November contest that will come back to haunt taxpayers next tax season.

“We oppose any attempts by the administration to systematically under-withhold income taxes during the 2018 tax year, knowing that in 2019 taxpayers may find they owe taxes when they were expecting a refund,” Sen. Ron Wyden and Rep. Richard Neal, the top Democrats on congressional tax committees, wrote to acting IRS Commissioner David Kautter.

How the IRS — which is supposed to be apolitical — decides to implement withholding could go a long way toward shaping public opinion on the controversial law.

Workers could see changes in their paychecks as soon as next month, the agency said, and for many it will be the first time they see what exactly the Tax Cuts and Jobs Act of 2017 means to them.

Even before President Donald Trump signed the bill into law last month, Republicans were promising Americans they wouldn’t have to wait long to see the benefits.

“You’re going to start seeing a lot more money in your paycheck,” Trump said on Monday during a speech to the American Farm Bureau Federation.

Asked about Democrats’ warnings of politically motivated withholding changes, House Ways and Means Chairman Kevin Brady (R-Texas) said, “There’s never been any question about the IRS’ timely, accurate withholding tables, nor should there be today.”

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Democrats will “do and say just about anything to cast doubt” on the Republican tax program, Brady said.

The IRS did not respond to a request for comment.

There is a history of politicians trying to manipulate withholding, through obscure tables issued by the IRS, with an eye toward providing a short-term boost to the economy. President George H.W. Bush tried it ahead of the 1992 election, and the 1986 tax overhaul attempted, unsuccessfully, to quash refunds altogether.

Most of the new tax law took effect Jan. 1 because Republicans want it to boost growth before voters head to the polls this fall.

As Wyden and Neal pointed out, bigger paychecks now could mean a nasty surprise in 2019. Some accustomed to receiving annual refunds could find themselves suddenly in arrears to the IRS.

“This is not something you want to fool the American taxpayer about — you don’t want to have them feeling good because they’re getting a big bump in take-home pay only to be surprised next year,” said Larry Gibbs, a former IRS commissioner.

“People ought to be able to understand what is being withheld from their paycheck and what that means — not just in terms of a bump in take-home pay, but also whether they’re still going to get a refund,” he said.

How much is withheld is a product of two things: The allowances claimed on the W-4 form filed with employers, and the tables the IRS produces telling payroll administrators how much to withhold at given income levels, taking into account the allowances employees claimed.

The IRS is now working on withholding tables to reflect the new tax law. In a statement late last month, the agency suggested it would not be issuing new W-4s.

“This information will be designed to work with existing Forms W-4 that employees have already filed, and no further action by taxpayers is needed at this time,” the IRS said.

About 80 percent of taxpayers will get a tax cut averaging $2,100 thanks to the new law, according to the independent Tax Policy Center. About 5 percent will face tax increases averaging $2,800 while the remainder will see essentially no change in their tax bills.

Taxpayers have long prized their tax refunds. The share receiving money back from the IRS at tax time has been firmly lodged at 70 percent or more since the 1960s, despite complaints from experts that it amounts to giving the government an interest-free loan.

In 2016, Kautter, then working at a consulting firm, bemoaned the number of people receiving refunds each year, while acknowledging taxpayers like being essentially forced to save.

“It drives me nuts,” Kautter told POLITICO that April. “You don’t lend money to other people interest free.”

For millions, it is the single largest payment they receive all year.

The IRS generally likes people getting refunds as well, because it means fewer people who owe taxes it must chase down.

So the withholding sweet spot might be for people to get bigger paychecks this year, but not so large that it erases their refunds next year.

That will be technically difficult, experts say, because the Republican plan dumped the concept of personal exemptions, which are key to figuring out how much to withhold from someone’s paycheck, and it’s not clear how the agency will make up for that.

What’s more, about 8.5 million taxpayers will see tax increases, according to TPC, which not only threaten their refunds. It could also put them at risk of incurring underpayment penalties the IRS imposes on those who pay less than 90 percent of their taxes during the calendar year.

The IRS has provided little guidance thus far on how exactly it intends to proceed, leaving payroll administrators scratching their heads.

“There’s definitely some unanswered questions,” said Mike Trabold, director of compliance risk at Paychex, a payroll administration firm.

He wonders if the IRS will make any withholding changes retroactive to the beginning of this year. Others wonder if and when the agency will have to develop new W-4 forms, and whether it will waive those underpayment penalties.

Lawmakers have tried to increase people’s paychecks before, by unilaterally changing withholding, and faced a backlash from the public.

The 1986 overhaul ordered the Treasury Department to devise a more accurate withholding system that would slash the number of people getting refunds each year. “You can kiss your tax refund goodbye, and with it the summer vacations, new refrigerators and fall wardrobes it has paid for,” The Washington Post reported in April 1987.

But the revised W-4 form the agency produced was so complicated that it became hugely unpopular and was dropped.

A few years later, Bush, then running for reelection, ordered the government to withhold less from paychecks in hopes of boosting the economy.

But many people didn’t want the extra money if it meant losing their refunds, and within a few years, refunds had returned to previous levels.

Bernie Becker contributed to this report.

