IRS Dictates Employee Withholding Amounts

By: Charles J. Read


The IRS has set up a program where it can dictate to an employer what an employee can withhold from their paycheck for Federal Income Tax purposes without any input from the employee and without a court order.

Under the new !a href="http://www.irs.gov/taxpros/article/0,,id=137393,00.html">Withholding Compliance Program, the IRS can issue a "lock-in letter" specifying what the withholding rate is for an employee regardless of the employee's W4. The employer is then required to do the following:


  • Furnish a copy of the lock-in letter to the employee upon receipt (though the first letter in our hands said ten days).


  • Impose the new IRS dictated withholding rate 60 days after the date of the letter.


  • Fax (the letter actually says mail or fax) a letter on Company Letterhead to the Internal Revenue Service if the employee is no longer employed.


  • Continue the lock-in process on gained employees based on the transferred W-4 and lock-in letter from a predecessor.


  • Ensure safeguards are in place to prevent employees from increasing their allowances electronically.


  • Maintain the withholding amount specified in the lock-in letter. There could be a penalty if the employer fails to honor the lock-in requirement and the employer could be liable for the amount of tax that should have been withheld.


  • Remind employees that the notice they received tells them how to contact the IRS if they want to change the withholding status and allowances from single/zero and the information they will need to supply. That information includes: Form W-4 and worksheets; most current pay stub for each job; number of allowances claimed on current Forms W-4; and the social security numbers and dates of birth for any children and proof of any deductions they want to use to claim additional withholding allowances.


There are several chilling points in the most recent IRS article released June 30, 2006. These points are above and beyond the actual regulations issued last year with little fanfare.


  • The article specifically references single/zero as the status and allowances that the lock-in letter will have on it, no other option.


  • Penalties could be imposed on the employer for at least the amount of tax not collected, additional penalties and interest will, of course, be extra.


  • All employee self service software modules will have to be controlled to allow the employer to lock out changes by a particular employees.



Other point that are not specifically addressed by the IRS include:


  • The employer is responsible for this lock-in rate forever. If any change in the employee's circumstances change such as a marriage, a baby or a home purchase, the employer will have to check their files back to date of hire to make sure they can allow a new W-4 form from the employee to go into effect.


  • The IRS does not define what circumstances, other than "serious underreporting," that will cause a lock-in letter to be issued in the first place.


  • The IRS gives no guidance to employees on exactly what will cause the IRS to modify a lock-in letter. Neither does it tell the employee what kind of time frame to expect a change from the IRS after a request and documentation are submitted.


  • The "Transferred W-4 and lock-in letter from a predecessor" phrase does not appear anywhere else in a search of the IRS internet site. Therefor no employer has any idea of what it actually means. If you acquire a company or merge with another company are you responsible to know the status of every employee back to date of hire in reference to a lock-in letter?


  • Finally the IRS nowhere tells the employer how, when or why it will modify a lock-in letter. Nor does it discuss what the responsibilities the employer has when and if the IRS does modify it. The IRS really leaves the employer in the dark on changes.


Employers need to be aware of the above changes in the law and make the necessary adjustments to their systems to prevent oversights from happening. The initial letter to the employer is fairly straight forward but the unlimited time frame and enormous potential penalties make it imperative that every employer upgrade or install a system to track this information perfectly.

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Charles J. Read, CPA has been in the payroll, accounting and tax business for 30 years, the last fifteen in private practice. Mr. Read is the author of "Tax and Accounting Issues in Forming a New Business." To find professional payroll services at a budget price go to www.payrollonabudget.com a paperless payroll company. For a full service payroll bureau with CPA's on staff visit www.CustomPayroll.com . See an excerpt of Mr. Read's interviews from William Shatner's "Heartbeat of

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