Shortcut Around the W-4 Puzzle
QUESTION: I understand that under the new tax law I will be penalized if the amount of income tax I pay through withholding, together with my quarterly estimates, is less than 90% of the amount I owe at year-end. But isn’t it also true that if you pay throughout the year at least as much as your total 1986 tax bill, you won’t be penalized--even if that amount is less than 90% of your 1987 bill? Stories about the new withholding laws never mention the second rule, and I’m almost certain I am right.--L. H.
ANSWER: You are absolutely correct. If you are puzzled by the new W-4 withholding rules and uncertain how much to have withheld, you can’t go wrong with the IRS if you just make sure that you pay in at least as much as the federal income tax you owed last year.
Conversely, if you miscalculate and wind up paying in less than last year and less than 90% of your actual 1987 bill, you could face a $500 penalty. Worse, you would be subject to criminal penalties if the government decides that you willfully gave false or fraudulent information on your withholding form or tax form.
This element of “willfulness” is what separates a criminal fraud charge from civil fraud in the eyes of the IRS. Basically, courts interpret “willfulness” as having an evil motive.
Willful failure to pay taxes or to file a tax return is a misdemeanor punishable by up to a year in jail and a $25,000 fine.
Q: As I understand it, the new tax law specifies that employees who participate in a pension plan at work must be vested after five years beginning in 1988. Is that correct?--F. B.
A: Actually, employers have a choice. Employees must either be fully vested in the company’s retirement plan after five years of company service or after seven years, if the company follows a graduated vesting plan. Either way, the new rules take effect Jan. 1, 1989.
For employers who choose graduated vesting, they must give plan participants a vested interest of 20% after three years of service and must increase that percentage by 20% each year until 100% is attained after the seventh year.
To be vested in a retirement plan means that you have the right to receive payments from the plan when you leave the company--even if it is long before retirement. Lawmakers changed the vesting laws to ensure that more employees will receive at least a small distribution from their retirement plans when they leave their companies.
Q: I gave my accountant power of attorney about three years ago and notified the IRS that all correspondence from them to me should be sent to my accountant. But recently I found out that the IRS mailed several tax-deficiency notices to an address I left almost four years ago. I am furious and determined not to pay them the interest and penalties they say I owe on the back taxes. I am right, aren’t I?--R. V.
A: You should consult a lawyer, of course. But, generally speaking, the IRS almost always wins in cases like this.
Tax researchers who make their living spotting trends in IRS and tax court rulings say taxpayers generally lose on such notice issues unless they can show that the IRS had their new address and sent the notice to an old address anyway.
The lesson here: Even if someone else handles your tax affairs, always tell the IRS where it can find you.
