W-4 Submissions, Employer responsibilities for Invalid or Incorrect ones?

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When adding new employees to your company, one of the many initial duties required are the submissions of W-4 forms for income tax withholding. In addition, current employees may choose to change their W-4 filing status as their personal situations evolve over time.

Generally, an employer is supposed to accept their employees’ withholding claims as valid, but what should an employer do if he or she knows a W-4 is “invalid” or “questionable?” After all, in extreme circumstances, the employer may be held liable for uncollected taxes. These issues were recently discussed by panel of private and public payroll professionals on an IRS-sponsored webcast on May 13, 2003.

Stephen Barnes, operations manager for collection with the IRS’s Fresno Compliance Center, agreed that bogus W-4 form submission can be a problem for employers, but also stressed that many of the withholding-generated problems an employer faces can and should be addressed at the time employment is initiated.

The most critical juncture for the employer/employee withholding relationship begins at the time employment is commenced. Employers should verify that the name and Social Security number listed on the employee’s W-4 form are correct. This can be done by calling the Social Security Administration (SSA), which will then, at no cost, verify the veracity of the information provided by the employee.

This confirmation is important not merely for accuracy-related reasons, but also because the SSA tracks the employee’s lifetime earnings and payments into the Social Security trust fund, which determines the employee’s Social Security entitlement at retirement. Barnes recommended that employers ask to see the employees’ Social Security card upfront, “because this will solve accuracy problems at the outset and avoid any pitfalls that might occur down the road.”

Invalid W-4s

One of the more difficult issues facing an employer concerns situations where the employee is under-withholding or is claiming an exemption from the withholding requirements for illegitimate reasons. Employers are generally bound by the employees withholding decision unless it is clear that the reason for the employee’s withholding decision is not legitimate. Such would be the case where, upon turning in the W-4 form, the employee comments to the employer that the withholding rate or exemption indicated is based on bogus legal arguments or untrue statements of fact. Taxpayers sometimes take the incorrect position that withholding is not required because the tax system is unconstitutional, or that some other legal fiction does not require withholding.

Employers encountering obvious fraudulent or ill-conceived interpretations of the law are free to reject the employee’s W-4 as invalid. When this occurs, the employer should impose the maximum withholding rate on the employee until a valid W-4 form is resubmitted. Barnes added that a W-4 is also invalidated if the form has been altered in some material way.

However, employees are still free to claim that they are exempt from the withholding requirements if the reason for doing so is legitimate. This generally only arises where the employee had no tax liability in the previous year and also anticipates no tax liability for the current tax year.

Questionable W-4s

A questionable W-4 includes forms submitted by an employee that indicate ten or more withholding allowances or that claim a withholding exemption, despite the employee having anticipated wages in excess of $200 per week. Barnes urged employers encountering this problem to submit the W-4 to the IRS for review so that the agency may conduct a thorough investigation.

However, employers cannot reject questionable W-4s in the same manner that invalid W-4s can be turned down. Instead, the form is considered valid until proven otherwise, and the employer is bound to withhold at the rate indicated on the questionable W-4 Form.

If a change needs to be made to the form, the IRS will send the employer a “lock-in” letter, indicating the appropriate rate of withholding. The employer will be bound to withhold at the rate indicated in the letter, and failing to do so may result in employer liability for the amount that should have been withheld.

Barnes further noted that the submission of questionable W-4 by employees is an ever-increasing problem. Within the last 12-month period, the IRS has received over 840,000 questionable W-4 employer inquiries nationwide. Barnes cautioned that while that number may appear high, it is likely that many more questionable W-4s are not being submitted.

Moreover, Barnes said that submissions of questionable W-4s has risen in the last few years as the number of web sites devoted to perpetuating fraudulent tax schemes has increased: “It is definitely a growing problem. People are buying into these schemes. There are organizations with web sites that promote bogus legal arguments, and they are proliferating.”

Despite the enormity of the problem, Barnes urged employers to continue submitting questionable W-4s and to be patient while the investigations run their course.

Source – By Daniel Rinke, CCH Washington Staff Writer

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GVA serves the Individual & SME community by offering a wide range of services, which typically are offered by a large HR consulting and Big 5 Accounting firms. Services include, Mobility services, Taxation, Incorporation, Accounting & Payroll processing services. Disclaimer: GVA does not offer legal services or legal advice, but only generic information on legal subjects. GVA is not an attorney or law firm and not a substitute for an attorney or law firm. Do not make any decisions based on the contents of this post. Contact sales@globalvalueadd.com if you are looking for professional advisory service.

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  • Karen Henline

    One of our highly compensated essential personnel has handed in an “EXEMPT” W-4. I questioned and was assured it was understood what was being done. I contacted the payroll company and faxed them a copy. They told me we were under no obligation to submit to IRS. What is our liability as a coporation for this if it is incorrect? We have returned it to that person to have them review it again.

  • You issue an “EXEMPT” W4 only if your income for the year will be less than $800. I suggest you as the employer get an explanation from the employee and document it. You may also inform the employee that it is subject to IRS check and he may be called to explain. Payroll companies usually doesnt care what data you give them…they are just concerned about processing it. Check out http://www.globalvalueadd.com…we do offer payroll services for small businesses. Goodluck