What Can the I.R.S. Do if You Inflate Your W-4 Allowances?

Let’s say you adjust your W-4 so that you have less income tax withheld from your paychecks (or none at all). Then when April rolls around, you file your 1040 and it says that you owe a ton.

Is the IRS going to let you get away with that? Wasn’t the reason why withholding was instituted in the first place to prevent you from owing your income tax in one, in-your-face, anger-inspiring, lump sum at the end of the year?

The IRS has a couple of deterrents:

  1. If you owe $1,000 or more in taxes when you file your 1040 and you owe more than 10% of the total tax you owe for the whole year (or if you’re self-employed and you neglected to file quarterly returns), the IRS may hit you with an “Estimated Tax Penalty.” (But there are lots of valid excuses, exceptions, and caveats. See this article for instance.) The penalty isn’t that bad as these things go — some people are even willing to swallow it because they think they can beat the penalty with the rate of return on the investments they’re buying with the money they’re not sending to Washington. If you want to see how the penalty is calculated, take a look at the following PDFs: Form 2210 & Form 2210 Instructions.
  2. The IRS may decide to stop allowing you to file your own W-4 form. More accurately: they may demand that your employer ignore any W-4 forms you file and accept a W-4 form the IRS files on your behalf instead. At this point, in order to keep taxes from being withheld from your paycheck you either need to get another job, or you need to convince your employer to risk civil disobedience.

Not much of a stick. The carrot, for you as an employee, is mostly that if you have your withholding set to pretty much match what you owe, you don’t have to think about it much, and there’s no big tax bill in April. If you’re feeling a little sick inside when you see part of every paycheck being sucked into the Pentagon, though, that’s not likely to be sufficient comfort.

Among the entities who aren’t paying the taxes the federal government says they owe to the federal government is… wait for it… the federal government.

“As of ,” according to TIGTA, “Federal Government entities owed approximately $45 million in delinquent employment taxes” (you can add to that another $254 million that state and local governments are neglecting to kick back to Washington).

The report adds: “It is critical to the image of the United States that Federal Government entities be held to the same standards as private employers.” However:

IRS policy prohibits the use of enforcement actions, such as the filing of liens or levies, against Federal entities. Thus, the ability of the IRS to enforce collection of delinquent taxes from Federal Government entities is limited.

And so it should not surprise you that somehow the “pay what the IRS says we owe” item keeps getting left out of these federal government agencies’ budgets (or, as the report puts it, “in general, Federal Government agencies cannot use current funding to satisfy debts properly chargeable to a prior year”):

[In o]ur review… 99 entities owing $5.8 million had been assigned for resolution for more than 1 year. More than $1 million of the $5.8 million related to tax years and earlier. As discussed previously, as of , 143 Federal Government entities still had not filed 750 required tax returns. Further, 466 (62 percent) of the 750 unfiled returns related to tax periods at least 3 years old. The continued existence of significantly aged delinquent Federal Government entity accounts, despite the IRS’ [sic] repeated attempts to secure repayment, raises the possibility that these entities may simply not have the funding available to satisfy these delinquencies.

The report recommends that “The Director, Collection, SB/SE Division, should continue ongoing efforts to develop a process for resolving aged delinquent Federal Government entity accounts.” When a recommendation includes a phrase like “should continue ongoing efforts to develop a process for resolving” you know it’s doomed.