Inflated Withholding Exemptions What is Your Obligation as Employer

Issue: An employee fills out a Form W-4 on which he claims 99 allowances and exempt status. After you forward the W-4 to the IRS, you receive an IRS notice instructing you to withhold tax at the single, no allowances rate and to ignore any further W-4s from that employee. If you withhold per the IRS instructions, can the employee file suit against you to recover the withheld taxes?

Answer: No. An employer cannot be held liable to an employee for complying with its legal duty to withhold tax. If the IRS issues a directive instructing an employer to disregard an employee’s W-4 as defective, the employer must withhold based on the directive, not the W-4.

Ordinarily, an employer is not concerned with the number of withholding exemptions an employee claims on Form W-4. You are under no duty to determine whether the number of exemptions claimed is more than the employee is entitled to. If, however, you have reason to believe that the number of exemptions claimed exceeds the number the employee is entitled to, you should so advise the appropriate IRS district director.

The following are instances when a Form W-4 would be clearly invalid:

1. If an employee claims more than 10 withholding allowances (you must withhold on the basis of the statements made in that certificate until receipt of a notice from the IRS);
2. If an employee claims to be exempt from withholding and earns more than $200 per week when the Form W-4 is filed (you must withhold on the basis of the statements made in that certificate until receipt of a notice from the IRS);
3. If the Form W-4 contains an alteration or unauthorized addition or does not fully and clearly set forth the required information;
4. If the employee clearly indicates that the Form W-4 is false by an oral or written statement made to you before or when he or she submits the certificate.

Invalid withholding certificates must be submitted with Form 941, 941E, or 941-M for the last month of the reporting period. Copies of the invalid certificates must be sent to the IRS even if they are not in effect at the end of the quarter. The IRS may send you a notice to advise you that the employee is not entitled to claim exemption from withholding or is not entitled to claim a total number of withholding exemptions in excess of a number specified by the IRS. Regardless of whether you receive a corrected certificate from the employee, you must withhold on the basis of the maximum number specified in the IRS notice.

Cite: Pesci v. IRS, et al., (DC Nev 1999), Dkt. No. CV-S-98-00245-DWH.

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