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Can an employer accept a W-4 form from an employee claiming 99 dependents?

When  an employee submits a W-4 form where it is obvious the employee is claiming an incorrect withholding amount, employers must accept the form and withhold federal income tax based on the allowances claimed on the form. However, employers should inform the employee that the Internal Revenue Service (IRS) may later direct the employer to increase federal income tax withholding if the IRS finds that the employee's requested withholding is inadequate.

The IRS uses information reported on Forms W-2 to identify employees with withholding compliance problems. In this case, claiming 99 dependents might cause the IRS to issue a notice to the employer, called a lock-in letter, specifying the withholding rate and maximum number of withholding allowances permitted.

The process begins with the IRS sending a letter to the employer requiring the employer to start withholding additional income tax unless the employee contacts the IRS to explain why he or she should not have the withholding rate increased. The employer will also receive a copy that must be furnished to the employee that identifies the maximum number of withholding exemptions permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding exemptions.

The following are important points for employers regarding IRS lock-in letters:

  • Employers are required to adjust an employee's federal tax withholding no sooner than 60 calendar days after the date of the lock-in letter. Once a lock-in rate is effective, an employer cannot decrease withholding unless approved by the IRS.
  • If an employee wants to claim complete exemption from withholding or claim a withholding rate, withholding allowances and an additional amount that results in less income tax withheld than specified the lock-in letter, the employee must receive approval from the IRS.
  • Employers should continue withholding as required by the lock-in letter until notified by the IRS otherwise.
  • Employers must honor any Form W-4 from an employee that results in more income tax withheld than the withholding rate and withholding allowances specified in the lock-in letter.
  • Employers that use electronic W-4 systems must make sure the employee cannot override the lock-in letter to decrease withholding via the electronic system.
  • Lock-in letter provisions also apply to employees rehired within 12 months from the date of the notice.

Failure to comply with IRS lock-in withholding instructions can be costly, as employers that do not follow the IRS lock-in instructions will be liable for paying the additional amount of tax that should have been withheld.

It is also important to note that IRS Publication 505 includes the following information that employers may want to provide to employees with the instructions for completing the W-4:

You may have to pay a penalty of $500 if both of the following apply:

    • You make statements on your Form W-4 that reduce the amount of tax withheld.
    • You have no reasonable basis for those statements at the time you prepare your Form W-4.

There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.

These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error or an honest mistake won't result in one of these penalties.


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