Penalized for taxes paid, then re-classified

Posted by Tony Vincent on January 15, 2008, 8:01 am

Please log in for more thread options

I was an employee of a large financial company. I properly filled out
my W-4 and was satisfied with the way payroll taxes had been withdrawn.
Sometime in the fall I have been laid off and furnished with some
severance pay (less taxes).

At the last working day of the year, the company transferred some of
the already withdrawn income taxes, in order to make up for
under-withdrawn Social Security taxes. I learned about it the hard way:
my tax preparer shown me his calculations on penalties I owed to both
US and my State. When I contacted the company, they studied all my
proofs and agreed with the reason I paid penalties.

However, in spite of them being behind in tax withdrawing, compared to
the IRS and our state Revenue Dept. directives, the decision made by
the head of Corporate Audit was not to compensate me for those
penalties and extra work done by my preparer. The reason given to me: I
am ultimately responsible for paying my income taxes.

The amount in question was within $400. If I were to litigate, I would
add the cost of my time to prepare all the materials for my former
employer â€“ but I am not eager to do it. I have not petitioned IRS on
returning the penalties to me and charging my x-employer either. I am
wondering if there is another practical leverage, if any, in my case.

I understand that the total I owed in both types of the taxes would not
change. The issue is who is liable for penalties if W-4 was not
correctly followed.

Posted by Paul Thomas, CPA on January 16, 2008, 7:53 am

Please log in for more thread options

>I was an employee of a large financial company. I properly filled out

> my W-4 and was satisfied with the way payroll taxes had been withdrawn.

> Sometime in the fall I have been laid off and furnished with some

> severance pay (less taxes).

> At the last working day of the year, the company transferred some of

> the already withdrawn income taxes, in order to make up for

> under-withdrawn Social Security taxes. I learned about it the hard way:

I'm unclear why you think this happened. Social Security and Medicare are
pretty straight forward to compute.

> my tax preparer shown me his calculations on penalties I owed to both

> US and my State. When I contacted the company, they studied all my

> proofs and agreed with the reason I paid penalties.

> However, in spite of them being behind in tax withdrawing, compared to

> the IRS and our state Revenue Dept. directives, the decision made by

> the head of Corporate Audit was not to compensate me for those

> penalties and extra work done by my preparer. The reason given to me: I

> am ultimately responsible for paying my income taxes.

> The amount in question was within $400. If I were to litigate, I would

> add the cost of my time to prepare all the materials for my former

> employer â?" but I am not eager to do it. I have not petitioned IRS on

> returning the penalties to me and charging my x-employer either. I am

> wondering if there is another practical leverage, if any, in my case.

> I understand that the total I owed in both types of the taxes would not

> change. The issue is who is liable for penalties if W-4 was not

> correctly followed.

The W-4 has no bearing on Social Security and Medicare withholding. So
blaming the company for not following the W-4 as the reason the Social
Security tax was "under-withdrawn" isn't going to fly very far in court.

You probably need to gain a clearer picture on why an adjustment to Social
Security was necessary. Could it be there was some benefits that you
received that needed to be "grossed up" and included in your W-2? In that
case the only place to get the Social security tax is from the already
withheld income tax.

$400 due in tax wouldn't have any penalties associated with it. If that's
straight penalties, you need to be absolutely positive that nothing else in
your return would give rise to the additional tax - nothing else - because
their attorney will dissect your return line by line for the jury. I for
one, don't want an opposition attorney and a dozen of my "peers" from the
county ogling over my return.

There are ways to reduce or eliminate penalties. Have you looked into that?
Once you have a better picture of what happened, explain it to the IRS in
writing requesting the penalty be abated. They often will.

--
Paul A. Thomas, CPA
Athens, Georgia

Posted by Timothy on January 20, 2008, 8:23 am

Please log in for more thread options

wrote:

> >I was an employee of a large financial company. I properly filled out

> > my W-4 and was satisfied with the way payroll taxes had been withdrawn.

> > Sometime in the fall I have been laid off and furnished with some

> > severance pay (less taxes).

> > At the last working day of the year, the company transferred some of

> > the already withdrawn income taxes, in order to make up for

> > under-withdrawn Social Security taxes. I learned about it the hard way:

> I'm unclear why you think this happened. Social Security and Medicare are

> pretty straight forward to compute.

I am baffled too... tax withholding is essentially a prepayment plan.
The company takes part of your income and loans it on your behalf
(interest free) to the US Treasury. As long as they withheld the
standard amounts, I am not sure how you can get hit with a penalty. I
am also not sure how they can "transfer" funds already withheld as
Federal Income Tax to SS/FICA tax, since the funds for both taxes go
into a common pool.

I am wondering if there is some tiny little detail you are not
mentioning, e.g., you have significant income from sources other than
this job and/or some supposedly tax-free perks of your job (perhaps
the use of a company vehicle?) turned out to be taxable and/or your
marital status changed.

Posted by Tony Vincent on January 21, 2008, 7:33 am

Please log in for more thread options

> wrote:

>>> I was an employee of a large financial company. ...

>>> At the last working day of the year, the company transferred some of

>>> the already withdrawn income taxes, in order to make up for

>>> under-withdrawn Social Security taxes. I learned about it the hard way:

>> I'm unclear why you think this happened. Social Security and Medicare are

>> pretty straight forward to compute.

> I am baffled too... tax withholding is essentially a prepayment plan.

> ... how they can "transfer" funds already withheld as

> Federal Income Tax to SS/FICA tax, since the funds for both taxes go

> into a common pool.

> I am wondering if there is some tiny little detail you are not

> mentioning, ...

Here are some more details:
- during the year, there was about a dozen transactions where Payroll
corrected some of their prior errors or made other non-standard moves;
some of those transactions "returned" more taxes than the amount taken
when the incorrect payment took place;
- I bet, one day Payroll realized they underdid FICA, and, instead of
contacting me, just re-qualified some of the funds that went to the
joint SS/FICA pool to be known as FICA. It made me, rather than the
company, "ultimately responsible" for under-payment. Otherwise, the
blame would remain where it belonged.

Posted by Paul Thomas on January 22, 2008, 6:39 am

Please log in for more thread options

> Here are some more details:

> - during the year, there was about a dozen transactions where Payroll

> corrected some of their prior errors or made other non-standard moves;

> some of those transactions "returned" more taxes than the amount taken

> when the incorrect payment took place;

> - I bet, one day Payroll realized they underdid FICA, and, instead of

> contacting me, just re-qualified some of the funds that went to the

> joint SS/FICA pool to be known as FICA. It made me, rather than the

> company, "ultimately responsible" for under-payment. Otherwise, the

> blame would remain where it belonged.

Not to be too flippant, but if they withheld all the taxes correctly, you
would have had a smaller net pay. Since you already have the net pay, there
is nothing they can do except make adjustments between the FICA and Federal
taxes - already withheld. That is, unless you were willing to send your
employer a check to repay some of the under withholding that happened. And,
since it seems you are gung-ho about placing some *blame* on someone for
some reason, a trait you probably didn't just pick up, I suspect that no one
at the company wanted to ask you to repay your
higher-than-it-should-have-been net pay after you and the company parted
ways.

As I mentioned earlier, explain all the facts the best you can to the IRS
and ask them to abate the penalties. It seems they should do that given the
limited facts you presented here.

--
Paul A. Thomas, CPA
Athens, Georgia