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Author: buznitz One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121096  
Subject: Deliberately under withholding Date: 12/26/2000 1:52 PM
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Here is the situation: In 2000 taxable income is about $20,000 and tax will be about $3,000. In 2001 taxable income will be about $70,000 and income taxes estimated to be $20,000. If I deliberately keep withholding down to about $3,500 in 2001 and plan to pay about $17,000 on April 15, 2002 will there be any interest or penalties? The operative word is "deliberately". Will the IRS come after me?
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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43393 of 121096
Subject: Re: Deliberately under withholding Date: 12/26/2000 2:19 PM
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I think whether you can "deliberately" underwithhold like that depends on the source of your income. If you are self employed and by its nature your income is somewhat irregular, you have more leeway.

If you got a big raise for 2001 and are employed, and are now claiming a bunch of deductions to which you know you aren't entitled, that won't fly. Like you have no children or dependents other than yourself and your spouse and you claim 14 exemptions. No way. Leave your exemptions the way they were.

If in 2000 you were a student and now have a well-paying job, you should fill out your claims for withholding on an honest basis. Deliberate underwithholding can get you into a pile of trouble.

Now, if instead the source of that income is a huge capital gain that you realize in January, and your job income and withholding aren't affected, but you don't make quarterly estimates to cover the extra tax, you'll get away with that on the basis of safe harbor. You can always say you thought you'd be able to write the gain off against capital losses, but....
etc. In this case I'd expect the IRS to simply accept your check.

If your income is distributed unequally through the year and you got the bulk of it in December, there is a form to fill out to avoid penalties.

Best wishes, Chris

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43394 of 121096
Subject: Re: Deliberately under withholding Date: 12/26/2000 2:27 PM
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Chris,

I disagree with your answer to this post. As long as his 2001 withholding exceeds his 2000 tax liability, buznitz falls under the "safe harbor" provision. In his post, buznitz expects his 2000 liability to be $3,000. As long as he withholds or pays estimates of at least $3,000 in 2001, he can owe $1 million (or more) in taxes on April 15, 2002 and still not be liable for interest or penalties.

Ira

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43435 of 121096
Subject: Re: Deliberately under withholding Date: 12/27/2000 1:32 AM
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I disagree with your answer to this post. As long as his 2001 withholding exceeds his 2000 tax liability, buznitz falls under the "safe harbor" provision. In his post, buznitz expects his 2000 liability to be $3,000. As long as he withholds or pays estimates of at least $3,000 in 2001, he can owe $1 million (or more) in taxes on April 15, 2002 and still not be liable for interest or penalties.

What you say is true with respect to the estimated tax penalty. However, what Chris says with respect to withholding allowances is also true. The W-4 is signed under penalty of perjury, and a fraudulent W-4 is subject to a separate $500 penalty, which the IRS can and does impose.

If an employee claims more than a certain number of withholding allowances (I can never remember whether it's 10 or 15--it's in Publication 15), the employer must send a copy of the W-4 to the IRS. The IRS can require the employee to substantiate the number of allowances claimed and can require the employer to withhold at the single rate with zero allowances if it's not satisfied with the employee's response.

TMF ExRO
Phil Marti

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43508 of 121096
Subject: Re: Deliberately under withholding Date: 12/27/2000 7:30 PM
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Phil,

Yes, if buznitz claims more than 10 exemptions, the employer must file the W-4 with the IRS. I hadn't thought about this when I replied. BUT, if the W-4 needs more than 10 exemptions to get to the desired withholding tax level, I would give a statement to the employer, which can be forwarded to the IRS, stating that I believed I was preparing my W-4 with the expectation of falling under the "safe harbor" provisions for tax payments.

Personally, I don't believe that this creates a fraudulent W-4, but I will admit that one could argue that it does.

Ira

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Author: Skwire One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43531 of 121096
Subject: Re: Deliberately under withholding Date: 12/28/2000 1:25 AM
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The W-4 is signed under penalty of perjury, and a fraudulent W-4 is subject to a separate $500 penalty, which the IRS can and does impose.

If an employee claims more than a certain number of withholding allowances (I can never remember whether it's 10 or 15--it's in Publication 15), the employer must send a copy of the W-4 to the IRS. The IRS can require the employee to substantiate the number of allowances claimed and can require the employer to withhold at the single rate with zero allowances if it's not satisfied with the employee's response.


Hi Phil,

I think there was a discussion about this issue a while back (probably many such discussions). Two points come to mind about this issue:

1) If I recall correctly, the statement made under penalty of perjury is that you are "entitled" to the number of allowances claimed. One question (raised in the earlier discussions) is whether you are "entitled" to only withhold enough to be in the safe harbor or not.

2) An additional layer of ambiguity may be added if you instruct your employer to withhold a set amount rather than adjust your allowances. Arguably you do not violate the statement that you have not claimed more allowances that you are entitled to since you have not claimed any allowances.

I am not encouraging anyone to do this, and my recollection of the earlier discussion(s) is that neither approach was viewed as the better interpretation of the statement in question. However, it might be enough to avoid a perjury charge.

Phil, are you aware of any specific guidance on these points?

Thanks in advance


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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43537 of 121096
Subject: Re: Deliberately under withholding Date: 12/28/2000 4:34 AM
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Phil, are you aware of any specific guidance on these points?

I'm not. My guess would be that if the taxpayer can show a rational basis for the W-4 and is not filing balance due returns without payment in full, there isn't going to be any problem.

Somewhere there are Internal Revenue Manual guidelines for processing W-4 cases. One of these days I'll have to see if I can find them. (Some of the IRM is available online at the IRS site.) While they don't have the force of law, these procedures would at least give us an idea of what the IRS is looking at.

TMF ExRO
Phil Marti

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Author: malakito Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43549 of 121096
Subject: Re: Deliberately under withholding Date: 12/28/2000 10:41 AM
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I find this discussion interesting.

Personally, I claim more allowances than the W-4 worksheet entitles me to, because if I claimed what the W-4 said, I would get a large refund every year. I think part of the reason for this in my case is that my company pays a cash profit sharing from which they withhold at the highest marginal rates for both federal and state, and I am barely breaking into the 28% bracket now. These bonuses have run about 10% of my base salary.

This year, I did a preliminary guestimate return and it looks like I will have a balance owing of a bit less than $500 on the federal return. However, I have net capital gains of about $7,000 this year on which I paid no estimated taxes. If I didn't realize the gain, I'd probably be getting a refund of about $500 (because the $7,000 would be taxed at 15% mostly, which is about $1,050 in taxes). I normally wouldn't realize this large of a gain; in other words, next year I don't plan on overwithholding on my regular salary to cover gains I would realize next year.

Personally I'd like to end up owing the IRS a couple hundred each year by using the $1,000 safe harbor clause. But to do so requires "underwithholding". Failing that, I'd like to get as small of a refund as possible, but even doing that probably requires underwithholding as well.

--malakito.

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