New Regs. on Form W-4 Exemptions

According to News Release IR 2005-45, employers are no longer required to submit copies of Form W-4, Employees Withholding Allowance Certificate, to the IRS, when an employee earning $200 or more claims more than 10 allowances or a complete exemption from withholding, as was required under previous regulations. The Service hopes the new procedure will enhance compliance and reduce some of the burden on employers.

Form W-4 Rules

Sec. 3402(f)(2)(A) requires employees to furnish their employer with a signed Form W-4 on employment. Form W-4 allows several withholding exemptions, depending on, among other things, marital status; filing status; number of dependents; number of exemptions claimed by the employees spouse on his or her Form W-4, if married; and estimates of itemized deductions, credits and certain other deductions.

Previous regulations required employers to submit certain employees Forms W-4 to the IRS on the agencys written request. The Service could then notify the employer to withhold, using a maximum number of exemptions for an employee. Under those regulations, these employees had to furnish the employer with new Forms W-4 claiming a number of exemptions, if it was less than that stated in the IRS request. The new number was then used by the employer.

However, if the employee furnished the employer with a new Form W-4 claiming a complete exemption from withholding or more exemptions than stated in the IRSs request, the employee had to submit a written statement to the employer, along with the new Form W-4, stating the reasons for the exemption(s). The employer then forwarded that information to the IRS. The employer could not use the new Form W-4 for withholding purposes until it was approved.

New Regs.

The new temporary and proposed regulations no longer require an employer to submit any Forms W-4 to the Service, unless it receives a written notice requesting Forms W-4 for specific employees (TD 9196, 4/13/05). This change is the result of the IRSs development of a process to use information reported on Form W-2, Wage and Tax Statement. The Service believes that the process will identify employees who have problems complying with withholding requirements. If it determines that an employee underwithholds, it will ask the employer to increase that persons withholding; see Temp. Regs. Sec. 31.3402(f)(2)-1T(g)(1) and (2). Un-like the prior regulations, the Service does not need to obtain a copy of the employees Form W-4 from the employer first. The new process should also assist the IRS in identifying employees who fail to file a return.

Under Temp. Regs. Sec. 31.3402(f) (2)-1T(g)(2)(iv), an employee may appeal the IRS-imposed limit on withholding exemptions by submitting a new Form W-4, along with a written statement supporting his or her number of exemptions, directly to the Service rather than to the employer (which was required under the former regulations). According to Temp. Regs. Sec. 31.3402(f)(2)-1T(g)(2)(iv), to allow time for an appeal, the employer cannot put into effect the maximum number of withholding exemptions, as stated in the IRSs notice, until at least 45 calendar days after the date of the notice.

The new regulations continue to allow for the use of a substitute Form W-4, as long as the employer-developed version includes the worksheets contained in the official IRS form, under Temp. Regs. Sec. 31.3402(f)(5)-1T(a)(1). An employer does not have to accept an employee-developed substitute Form W-4, however.

Effective Date

The new regulations were effective April 14, 2005.

Comments

As the temporary regulations were issued in conjunction with the identical proposed regulations, the IRS welcomes comments.

From Larry R. Garrison, Ph.D., CPA, Professor of Taxation, University of MissouriKansas City, Kansas City, MO (Not Affiliated with Baker Tilley International)