Q. When hiring employees who we know are claiming excessive/nonexistent dependents on their W-4 to avoid paying federal income taxes and hoping not to be held accountable, do we have the right to have them produce some form of proof of the dependents? – Debbie, Tennessee
A. Prior to 2005, in an effort to combat tax avoidance, the IRS required any W-4 listing more than 10 personal allowances to be filed with the IRS. However, beginning in 2005, the IRS abandoned that practice in favor of a different process. Now, employers are directed that they should not knowingly use an invalid Form W-4 to calculate withholding.
If you know, you must tell the employee when a W-4 is invalid and ask for another one. However, the guidance is not all that clear. The rule says you are supposed to follow an employee's instructions unless you know the W-4 is fraudulent, which you can only know if the employee actually tells you. At the same time, the IRS also says you should know it is probably not correct.
As a practical matter, you can question the employee and remind them that filing a false W-4 is punishable by a large fine and potential jail time. And if they still want to implement it, so be it. The most likely response is a “lock in” letter from the IRS that will increase withholdings to the maximum and overrides any W-4s.