The Withholding Compliance program replaced the Questionable W-4 (QW-4) program.

The QW-4 program was designed to address those taxpayers attempting to circumvent the income tax withholding requirement by overstating their withholding allowances, or improperly claiming to be exempt from withholding. It was authorized by Treasury regulation (TD 7682) in 1980, with minor changes in subsequent years.

Under the QW-4 program, employers were required to submit to the IRS all Forms W-4, Employee's Withholding Allowance Certificate, that claimed complete exemption from withholding on wages of more than $200 per week or claimed more than 10 allowances.

Under the QW-4 program, after making a determination based on the taxpayer's Form W-4, the Service could issue a notice, commonly known as the "lock-in letter" . This notice directed the employer to disregard the taxpayer's Form W-4 and withhold using the marital status and number of allowances specified by the Service.

After reviewing the program, the General Accountability Office (GAO) issued a report which questioned the effectiveness of the program. Among the issues raised by GAO were

In response to the report, the Service conducted a comprehensive review of the QW-4 program and developed the Withholding Compliance (WHC) program. WHC identifies potential withholding non-compliance cases based on a review of Form W-2, Wage and Tax Statement, rather than using Forms W-4.

Temporary regulations (TD 9196), which took effect on April 14, 2005, eliminated the requirement for employers to routinely submit copies of questionable Forms W-4 to the IRS. After review and consideration of comments responding to the notice of proposed regulations, final regulations (TD 9337) were issued on July 13, 2007. Employers are required to submit copies of any currently effective withholding exemption certificates only if directed to do so in a written notice from the Service to the employer, or if directed to do so under any published guidance.

The Service will use information reported on Forms W-2 to more effectively identify taxpayers with withholding problems. In instances where a serious under-withholding problem exists for a particular taxpayer, the Service may issue a lock-in letter to the employer.

Sections 3402 and 3403 of the Internal Revenue Code (IRC) provide the legal authority for the withholding of federal income tax from wages and other forms of income. Section 3402 specifies the general form and content of withholding allowance certificates and outlines the basis for claiming withholding allowances or exemption from withholding.

Regulations in 26 CFR Part 31, Employment Taxes and Collection of Income Tax at Source, provide guidance for implementation of IRC Section 3402.

Section 31.3402(f)(2)–1(a) requires each employee to furnish his or her employer with a signed withholding exemption certificate on or before starting employment. The maximum number of withholding allowances to which an employee is entitled depends upon the following:

The requirement for employers to routinely submit copies of questionable Forms W-4 to the IRS has been eliminated. Regulations, as set forth in Section 31.3402(f)(2)–1(g), require employers to submit copies of any currently effective withholding exemption certificates only if directed to do so in a written notice to the employer or if directed to do so under any published guidance.

An employer must honor a valid withholding allowance certificate furnished by an employee until the Service provides the employer with written notice to disregard it. The IRS may issue such a notice after it determines that an employee's withholding claim is unjustified based on IRS records without first obtaining a copy of the Form W-4 from the employer.

Section 31.3402(m)–1 of the Employment Tax Regulations specifies items used to compute withholding allowances. Estimated amounts of deductions, losses, and credits used to compute withholding allowances may not be more than:

An employee may claim exempt from withholding by furnishing the employer with a valid exempt Form W–4 certifying that he/she:

Exempt Forms W–4 generally expire on February 15th of the year after they were furnished by the employee. If an employee fails to furnish a new Form W–4, the employer is required to withhold as if no valid Form W–4 was in effect, "single" status with"zero" withholding allowances. If, however, a prior Form W-4 is in effect for the employee, the employer must continue to withhold based on the prior Form W-4. Refer to Publication 15, (Circular E), Employer's Tax Guide, for additional guidance.

IRC Section 6682 and the related tax regulations allow the assessment of a $500 civil penalty on an individual for furnishing a false Form W–4 if:

IRC Section 3403 makes an employer liable for tax imposed under IRC Section 3402 and the related tax regulations:

Employers are required to give Form W-2 to their employees by January 31st of the year following that in which the wages were paid. A copy of Form W-2 must also be filed with the Social Security Administration (SSA) by the last day of February of the following year (March 31st if filed electronically). Approximately 236 million Forms W-2 were filed with the SSA in 2005. Form W-2 records received from the SSA are loaded into the Information Returns Master File (IRMF).

Enterprise Computing Center (ECC) then selects Forms W-2 from the IRMF that meet criteria established by WHC. See LEM 5.19.11.2.1(2). Once the Forms W-2 are selected, ECC creates an inventory record using Form W-2 and Master File (MF) data.

Business rules (See LEM 5.19.11.2.1(3)) established by WHC are applied, resulting in three potential outcomes:

Forms W-2received from SSA after the initial case creation are processed by WHC at the end of each calendar year following the year in which the wages were paid.

WHC cases will be worked by the Withholding Compliance Unit at the Andover Compliance Campus.

Organization Function Program (OFP) codes have been established for WHC.

The following 97X transaction codes (TC) have been designated to identify actions on WHC cases:

Taxpayers with unreversed TC 971 Action Code (AC) 146 transactions are identified by the following Individual Master File (IMF) entity indicator codes:

TC 971 with AC 147 will be used to generate listings of Outcome 3 cases to the site to be worked. The transaction shows the reason code for Outcome 3 selection.

Transaction Code (TC) 971 with Action Code (AC) 146 will post to Master File to identify Outcome 2 cases where a lock-in letter has been systemically issued. The transaction will appear on the year in which the taxpayer was locked in and will provide the following information:

Subsequent transactions will be posted to the year in which the taxpayer was locked in.

WHC case inventory will come from three sources:

Cases will be batched through Desktop Integration (DI) and assigned to a tax examiner.

Tax examiners will

WHC outgoing correspondence consists of the Correspondex generated letters shown below. Current versions of the letters are available on Servicewide Electronic Research Project (SERP) using the Forms/Letters/Pubs tab.

The following forms and publications and notices are also used:

In addition to the letters shown above, tax examiners will use Correspondex Letter 2645C to issue an interim response in accordance with Action 61 guidelines as set forth in IRM 21.3.3.4.

Take the following actions:

An interim response must

In order to deliver quality customer service, address all of the taxpayer's issues related to withholding, filing and payment. To accomplish this, take all appropriate actions to correct withholding, resolve any balance due account(s) and/or secure unfiled returns while the taxpayer is on the telephone.

Follow procedures in IRM 5.19.1 when working balance due accounts and IRM 5.19.2.6.4.5 when working return delinquency accounts.

The following steps should be taken on all calls:

Key points for every call:

Complete and accurate case documentation promotes quality and consistency in working WHC cases.

Document each taxpayer contact and/or action taken on the case in the DI history. When contacted by an employer ask the caller for the name and Social Security Number (SSN) of the taxpayer to which the call relates, then document the taxpayer case as appropriate.

History entries will contain enough information so that any person subsequently reading the history can easily determine what decisions were made, why those decisions were made, what actions were taken, and what further actions are required to resolve the case.

Complete documentation includes, but is not limited to the following:

Add or update case information to WHCS as appropriate. See the WHCS User Guide for instructions.

Letters 2800C and 2801C, mailed to the employer and the taxpayer, respectively, are commonly known as the "lock-in letters" . Letter 2800C instructs the employer to disregard the Form W-4 submitted by the taxpayer and withhold at the marital status and the number of allowances determined by the Service. Letter 2801C advises the taxpayer that the employer has been instructed to disregard the Form W-4 submitted by the taxpayer and withhold at the rate specified in Letter 2800C.

Mail Letter 2801C to the taxpayer's last known address as defined by Treas. Reg. Sec. 301.6212-2. As a general rule, the last known address is the address that appears on the taxpayer's most recently filed tax return or as updated by the National Change of Address (NCOA) database. For further guidance regarding the definition of the last known address see Rev. Proc. 2001-18, 2001-1 C.B. 708.

Letters 2800C and 2801C are mailed at the same time.

This section contains procedures for preparing and processing referrals submitted to the Withholding Compliance (WHC) program.

Section 31.3402(f)(2)-1(g)(2) of the Employment Tax Regulations provides that the IRS may issue a notice, commonly referred to as a "LOCK-IN LETTER" , to an employer specifying the marital status and maximum number of withholding allowances permitted for a specific employee (taxpayer). All IRS employees should address under-withholding as part of a full compliance check and consider referring taxpayers to the Withholding Compliance (WHC) unit, when appropriate, for the

After reviewing the referral, tax examiners in the Withholding Compliance Unit will determine whether the taxpayer's withholding should be adjusted and the lock-in letter issued and/or whether to assert the penalty.

DO NOT initiate a lock-in letter, reconsider or modify any previously issued lock-in letter, or process any referral based on an invalid Form W-4.

Any alteration of, or unauthorized addition to a Form W-4 makes it invalid.

Invalid Forms W-4 can be recognized by

An employer who receives an invalid Form W-4 from an employee must take the following actions:

If an invalid Form W-4 is submitted with a referral, reject the referral. Notify the originator to advise the employer to follow the procedures outlined in (4) above.

If the taxpayer submits an invalid Form W-4 in response to a lock-in letter, or with a request for reconsideration of a previously issued lock-in letter, advise the taxpayer that the Form W-4 is invalid and ask for a new one. DO NOT process any request for reconsideration based on an invalid Form W-4.

Accountants, attorneys, enrolled agents, or other persons acting as representatives through whom a taxpayer requests assistance from the Service, must have a valid Power of Attorney (POA). For Centralized Authorization File (CAF) purposes, representative must submit a Form 2848, Power of Attorney and Declaration of Representative. Taxpayers may also authorize the release of their tax information to representatives and others through the use of a Form 8821, Tax Information Authorization. We refer to powers of attorney as "POAs" and tax information authorizations as "TIAs" .

Any form used in lieu of these two forms should contain the following information:

The tax year listed on the POA or TIA must match the year in which you are working the withholding issue.

If the POA or TIA form only includes the current year, you cannot discuss any other years. Ask the taxpayer's representative to submit a new form to cover the years to be discussed. Use general information to explain the program.

If you are speaking to the taxpayer's representative by telephone, research IDRS using CC CFINK to determine if the POA or TIA is already on file. If the POA or TIA is on file, verify that it includes the correct tax period. If it does not include the correct tax period, or there is no record on CC CFINK, advise the taxpayer's representative to fax you a new or updated signed form. If the form is acceptable, forward the original to the POA or TIA function in the respective campus via Form 3210.

If correspondence is received from a third party and there is no record on CC CFINK, or no Form 2848or Form 8821attached, use Letter 135C to advise the third party that we do not have a POA form on file. Use paragraphs E or F as part of your response.

If the Form 2848 is attached to the taxpayer's correspondence, compare the information on the form with that found on CFINK to verify it is for the same tax period. If not present on CFINK and the form is acceptable, photocopy the form, attach the copy to the correspondence, and then fax the original to the POA functional processing area as specified in the Form 2848 instructions for processing.

If authorization as in (2) above is not attached, before replying to a person other than the taxpayer who states he/she has a POA or TIA for the taxpayer, research the CAF using CC CFINK. Ensure that we have his/her POA or TIA on file before sending any information. If there is no POA or TIA, send the information directly to the taxpayer. Notify the taxpayer using Letter 3064Cthat a third party inquiry was received from (name), we have no record of a POA or TIA, and without a POA or TIA we are not permitted to furnish information to a third party.

TAS will forward Form 12412, Operations Assistance Requests (OAR), to the WHC TAS Liaison on Form 3210.

The OAR will be assigned to the WHC manager or lead on a rotating basis for control and assignment out to the tax examiner.

OAR cases take priority over other withholding compliance work.

Review the OAR to see what action has been requested, research the taxpayer account on IDRS and the WHC database to determine what actions need to be taken. In most instances you will work the OAR as a redetermination request.

If you can resolve the withholding compliance case from available information follow normal case processing procedures.

If additional taxpayer contact is needed, DO NOT contact the taxpayer yourself unless you have conferred with the TAS caseworker first.

Once you have completed all actions necessary to close your case, update WHCS, notate your actions on DI and also in Section VI, Part 1a, of Form 12412.

Regulations permit taxpayers to claim only the number of withholding allowances to which they are entitled. Withholding tax cannot be construed as a hardship.

Undelivered mail is any letter, notice or other correspondence sent to an individual or business taxpayer and returned to the IRS with an indication that the individual no longer resides, or the business is no longer located at the address where the mail was sent. The following sections contain instructions for handling the various kinds of letters returned by the United States Postal Service as undeliverable.

Undeliverable mail is received in Receipt and Control Branch. For the Withholding Compliance program, this mail may include but is not limited to: Letters 2800C, 2801C, 2804C, 2808C, 2809C, 2810C, 2811C, 2812C, 2813C, 3042C, and 2645C. Undelivered mail may contain a "yellow" forwarding label from the United States Postal Service (USPS) or a note indicating the party no longer resides there.

All undelivered Withholding Compliance mail will be batched as undeliverable and reviewed.

Undelivered mail will be processed as shown in the table below:

Additional Forms W-2 (AW2) received from SSA after initial case creation are processed by ECC at the end of each calendar year. Processing results in one of the following:

AW2 records for current year Outcomes 2 and 3 cases that have not yet been sent to DCC and input to WHCS are added systemically. An annual listing is generated for cases that have already been added to WHCS by DCC.

The AW2 records on the listing require manual input to WHCS. Each record on the listing contains the following data elements:

For each AW2 on the listing, research the case on WHCS and take the following actions:

These cases meet lock-in criteria but fall into categories which require manual review by tax examiners before issuing Letter 2800C and Letter 2801C, commonly known as the lock-in letters.

Outcome 3 cases will be issued on a weekly listing. The listing will contain the following literals identifying the category type: CID, DIS, SSN, IRS, ADD, AW2. Thoroughly research the account as the preceding Outcome 3 category types are not mutually exclusive.

When working the listing, eliminate those employers who were issued lock-in letters in the past 18 months. To determine whether a lock-in was previously issued, look for an unreversed TC 971 AC 146, cross-referenced to that employer, within this period.

Do not issue lock-in letter(s) if the taxpayer meets compliance criteria in LEM 5.19.11.3.10(4). Document the DI history and update WHCS with TC 972 AC 146 and applicable disposition code. Do not update IDRS.

Issue lock-in letters to all remaining employers on the Outcome 3 listing EXCEPT where:

In addition, while working Outcome 3 cases, tax examiners must keep alert for those cases requiring special handling as identified in See IRM 5.19.11.4. Those cases are generally identified by freeze codes or other indicators on IDRS.

All decisions NOT to issue a lock-in letter, except as specified in (3), (4), (5) and (6) above, require managerial approval. The basis for the decision must be fully documented in DI.

The following category types are designated as Outcome 3:

Responses will generally result from taxpayers' correspondence or telephone contact as a result of the systemic issuance of lock-in letters on Outcome 2 cases or the manual issuance of lock-in letters on Outcome 3 cases and referrals. Redetermination requests will be received on previously closed cases. Work redeterminations the same way as a response to the lock-in letter.

Work responses promptly since the employer has been instructed to adjust the taxpayer's withholding starting with the first pay period ending on or after 60 days from the date of the lock-in letter.

Be alert for indicators of fraud. See IRM 25.1.2.2 for further information on recognizing fraud. If a potential fraud referral exists, DO NOT solicit the return. See IRM 25.1.3 for referral procedures.

If the taxpayer responds in writing questioning the legal authority supporting the Withholding Compliance program, send Letter 3042C.

When working requests for redetermination from taxpayers who have filed the most recently due return jointly and both spouses work, compute the number of allowances using one worksheet and lock in both spouses.

If the employer responds in writing that the taxpayer no longer works there, input TC 972, AC 146 to IDRS with Disposition Code "NLW" using the current date. Document DI history with employer's name, EIN, and the taxpayer's date of termination and close the case. Update WHCS and route the employer's response to the centralized retention file.

In some instances you may need additional information from the taxpayer to make a case determination. Make at least two attempts to contact the taxpayer by telephone at different times of the day/evening before writing to the taxpayer.

If you are unable to contact the taxpayer by telephone, send Letter 4243C listing the information required to resolve the case.

When speaking to the taxpayer, using IMFOLI, determine whether all delinquent returns have been filed. If the taxpayer is liable for any returns and there is no indication of fraud, take the following actions:

Responses and redeterminations are worked the same way and resolved in one of the following three ways: