I.R.S. Cracking Down on W-4 Allowance Inflation?

, I noted that the IRS was changing its policy about W-4 forms. we have some more information about how this change of policy may cause problems for tax resisters who try to prevent or reduce withholding.

Your employer uses the number of allowances you declare on this form to calculate how much to withhold from your paycheck each month to send to the IRS. The more allowances you claim, the less gets taken out. Some tax resisters claim a bunch of allowances so that nothing gets withheld.

Formerly, if you gave your employer a W-4 with a large number of allowances (more than ten, say), your employer had to forward that form to the IRS. Now, the IRS is going to rely on other methods of ferreting out suspicious W-4 forms — but in a way that actually puts a higher enforcement burden on employers than before.

Now we have some new information about how the IRS plans to crack down on W-4 exaggeration:

The IRS is cracking down on employees who have too little tax withheld from their paycheck and will also put employers in its sights if they try to shield underpaying workers by endorsing questionable W-4 forms.

Instead of just relying on the W-4s themselves, the IRS will start looking at individual tax returns to determine who is not having enough withheld.

If you have a balance due and you don’t pay those taxes when you file your tax return, the first thing IRS will do is to look at your W-2s to see how much total federal income tax was withheld. If it is clearly inadequate, both you and your employer will be getting letters from IRS telling you to file a new W-4 to raise your withholding.

…If the IRS asks for the new W-4 and you don’t reply, or if IRS rejects your calculations on the form, a “lock-in” letter will be sent to you and to your employer setting and freezing your withholding at the rate IRS requires.

If you have special circumstances this year, respond to the letter immediately and let IRS know, in writing, why your situation warrants the lower deductions.

W-4 to raise your withholding. Now here’s the really tough part. If you don’t comply, or if you try to get around the rules by filing a new W-4 or if you quit your job and start working for a new employer who doesn’t have the IRS lock-in letter, you’ll face penalties.

The IRS will charge you $500 to start with, and $500 for every new W-4 you file, with any employer in any year until the agency releases the conditions of the lock-in letter it issued.

Employers, especially in a small businesses where owners may be closer to employees, can be tempted to try to help out by fudging the W-4s or looking the other way when an employee files for unsupported exemptions. They may even be reluctant to enforce the lock-in letters from the IRS. That kind of attitude will now cost them.

Employers who don’t enforce the W-4 compliance rules or who permit employees to file another W-4 with higher withholding after they receive a lock-in letter will be responsible for paying IRS all the federal income taxes that should have been withheld.

In other words, IRS is going to get their money from either you or your employee — you decide who pays.

If this isn’t just bluster on the part of the IRS, it could present a real challenge to those tax resisters who rely on interfering with withholding in order to resist the federal income tax.

See The Picket Line for an update on this.

Fred Ecks has a clue-by-four for those of us who think of personal budgeting like a teenager on a sugar high thinks of algebra homework:

When we go to work, we exchange our life energy for money. Then when we exchange that money for goods & services, we have just expended our stored life energy. If we don’t track how we earn and spend our money, how can we have any idea of whether we’re living in accordance with our values?

Sure, when we break out the cash or checkbook or card at the register, we know that we only have some amount of money available. However, when we tally our expenditures down to the penny at the end of each month, only then do we see clearly that we spent X on groceries, Y on housing, Z on transportation, etc. Without reviewing our actions, how do we know how we’ve been living?…

This is about spending in alignment with our values. For me, this means that I’ll choose junker furniture, but have of the best running shoes money can buy. It’s about making clear, conscious choices.

How many hours of your life did you spend on food last month? Do you wish you had spent more of your life on this, or less? How about transportation to visit with friends?

If we can’t answer simple questions such as these, we’re living in the dark.…

Can you imagine a business which doesn’t do detailed accounting? Why would we live more consciously as businesses than as individual humans?