Despite the fact that tax protestors are routinely penalized by the IRS and the courts, the number of people who try to illegally avoid paying taxes seems to grow every year. You may even find the discontent spilling over into the workplace.
It usually starts with a bogus Form W-4 filed with your payroll department. Watch out for tip-offs, such as a faulty claim for tax-exempt status, entries for an extraordinary number of withholding allowances or other false or misleading information.
And if an employee delivers a ten-page manifesto as to why withholding taxes violates the spirit of the U.S. Constitution, you've got a tax protester on your hands. Although it's good to be heads-up when you have a malcontent on staff who might affect morale, the actions you are required to take are now limited.
Previously, employers who were presented with W-4s that seemed problematic were required to automatically send those forms to the IRS so the agency could determine if the employees were trying to dodge their federal income tax responsibilities. A change in federal payroll tax rules eliminated this requirement back in 2005. Under the current rules, an employer is only required to submit copies of Forms W‑4 to the IRS when specifically told to do so in a written notice or in published guidance that applies to all employers.
This employer-friendly change is not to suggest that the IRS is no longer concerned about questionable W-4s. Instead of making the employer responsible for spotting these problems, the IRS has developed a new procedure that uses information already reported on the employee's Form W-2 to identify individuals who are likely to be out of compliance with federal income tax withholding rules. If an employee is thought to have a serious under‑withholding problem, the IRS will notify the employer to withhold federal income tax from that employee's wages at an appropriate rate.
As before, however, the IRS still has the power to issue a written notice to an employer that requires submission of copies of Forms W‑4 for specified employees. Also, the IRS can still develop specific criteria for identifying Forms W‑4 that must be submitted, and this can be done either via a written notice to a specific employer or by published guidance that applies to all employers.
If the IRS determines that a specific employee cannot claim more than a certain number of withholding exemptions or should not be allowed to be completely exempt from withholding, the employee (not the employer) must deal directly with the IRS by supplying a new W-4 and a written statement that supports his or her claims. The employer is out of the loop. The employee generally has 45 days to resolve the issue with the IRS before the employer is required to implement withholding changes.
Make it clear to employees that your company follows the rules and regulations of the Internal Revenue Code to the best of its ability. Create strict deadlines for filing W-4s to deter timing scams. What if an employee does not give you a completed W-4? The IRS instructs employers to withhold tax as if the employee is single, with no withholding allowances.
Be on the lookout: Phony but official-looking forms have been making the rounds among employers. They include Form W-4T (Voluntary Withholding Agreement, Termination or Withdrawal Form W-4 Agreement) and Form SSN (Citizen's Assertion of Legal Right to Withhold Disclosure of SSN). If you come across either one, contact your tax advisor.
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