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Don't Mention It

Your reporting burden may now be a little bit lighter.

Federal paperwork requirements got you down? The IRS is providing a little relief-but along with it come some new requirements.

The agency recently announced that employers no longer have to send in copies of potentially questionable W-4 withholding forms from employees. In the past, employers were required to send the agency any W-4 forms that claimed more than 10 allowances or claimed complete exemption from withholding. Now, the IRS plans to uncover withholding noncompliance problems by using information already reported on W-2 forms to more effectively identify workers who may not be deducting enough from their paychecks.

"The IRS issued the change because it realized there was an opportunity to reduce the burden on employers by reducing these unnecessary reporting requirements," says Eric Smith of the IRS. Now, employers only need to send in a W-4 if the IRS sends a written notice saying there is a problem with a specific form.

Not everyone agrees that the change will help entrepreneurs much. "The change may be beneficial for the IRS, but it isn't necessarily beneficial for small-business owners because it has the potential to increase the paperwork burden for employers," says Carol Markman, CPA and president of the National Conference of CPA Practitioners based in Mineola, New York.

Indeed, employers must follow more steps now if the IRS uncovers a withholding problem. For example, if the agency finds a problem, it will send employers a "lock-in" letter, asking them to withhold income tax from the employee at a more appropriate rate. It's your responsibility as the employer to withhold tax in accordance with the lock-in letter unless you are otherwise notified by the IRS. Once the rate becomes effective, you can't decrease withholding unless the IRS approves it. In addition, if you fail to follow the letter's instructions, the IRS says you will be liable for paying the additional amount of tax that should have been withheld.

If your employees aren't sure about how many allowances to claim, they can turn to a withholding calculator on www.irs.gov that will help determine the proper withholding. The tax agency says it is still doing all it can to be sure the "pay as you earn" tax system isn't compromised.

Great Falls, Virginia, writer Joan Szabo has reported on tax issues for 18 years.

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This article was originally published in the December 2005 print edition of Entrepreneur with the headline: Don't Mention It.

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