United States General Accounting Office 

Washington, DC 20548 

November 6, 2003 

The Honorable Mark W. Everson 

Commissioner of Internal Revenue 

Subject: 	 IRS’s Use of Information on Taxpayers Claiming Many Allowances or 

Exemption From Federal Income Tax Withholding 

Dear Mr. Everson: 

In September 2003, we responded to a request from Representative Elton Gallegly to 

provide information on the number of taxpayers who claimed more than 10 

withholding allowances and taxpayers who claimed exemption from federal income 

tax withholding. The Internal Revenue Service (IRS) calls such claims questionable 

Form W-4s. However, in the course of performing our work, we became concerned 

about the reliability of the information that IRS maintains on these taxpayers and 

decided that we could not use it to answer Representative Gallegly’s questions. For 

background, see our letter to Representative Gallegly in enclosure 1. 

The objectives of this letter are to summarize our findings about the reliability of the 

information IRS maintains on taxpayers who claimed more than 10 withholding 

allowances or exemption from federal tax withholding and to bring to your attention 

some resulting questions about the value of IRS continuing to collect the information. 

Results 

We have two concerns about the information that IRS maintains on taxpayers who 

claimed more than 10 withholding allowances or exemption from federal tax 

withholding that precluded us from using it to respond to Representative Gallegly’s 

questions. First, we are concerned about the completeness of the information 

because a significant number of employers may not send IRS the required forms. 

According to IRS’s information, about 75 percent of the large employers with 1,000 or 

more employees in its Large and Medium-Size Business (LMSB) and Small 

Business/Self-Employed (SB/SE) divisions that filed employment tax returns in tax 

year 2001 did not send IRS any forms. Although the number of questionable Form 

W-4s IRS might receive from individual employers can vary, it seems unlikely that 75 

percent of employers with 1,000 or more employees could have no employees who 

submitted questionable Form W-4s. Second, some of the information may not be 

current—it may not reflect the current withholding status of some taxpayers. If an 

employee who previously claimed more than 10 allowances or claimed exemption 

GAO-04-79R IRS’s Questionable Form W-4 Program 
from federal income tax withholding submitted a new Form W-4 claiming 10 or fewer 

allowances or not claiming exemption from withholding, the database would 

continue to show the earlier information. There is no requirement for employers to 

submit Form W-4s other than those claiming 10 or more allowances or exemption. 

We could not quantify the significance of our concerns about the reliability of IRS’s 

data; however, the uncertainty about how complete and current the data were 

precluded us from using them to respond to Representative Gallegly’s questions. 

While acknowledging the limitations of the information in the Questionable Form W-4 

database, IRS’s Wage and Investment (W&I) Division officials stated that the 

information in the database was useful to them for tax compliance purposes. The 

officials said that they use the database to identify useful leads in determining 

possible underwithholding issues that can lead to noncompliance. For example, tax 

examiners at IRS’s Fresno Computing Center routinely review the withholding 

information of certain taxpayers to substantiate their claims. If the taxpayers cannot 

substantiate their claims, the examiners would require that the taxpayers’ 

withholdings be adjusted to appropriate levels. According to the Treasury Inspector 

General for Tax Administration, about 70 percent of the cases closed by the 

examiners in fiscal year 2001 resulted in no changes to the taxpayers’ withholding 

claims.1 

However, considering what we learned about the reliability of the data, questions 

may be raised about the value and fairness of IRS’s enforcement efforts that rely on 

the database. One question is whether it is worth devoting IRS’s resources to 

maintaining a database of questionable reliability. According to information IRS 

provided us in July 2003, 32 full time equivalent staff was dedicated to the 

Questionable Form W-4 program. A related question is whether it is worth the 

burden borne by those taxpayers who send IRS forms. Another question is about the 

evenhandedness of IRS’s use of the database as a compliance tool. Taxpayers whose 

employers are not submitting questionable Form W-4s are less likely to face 

compliance checks under the program than taxpayers whose employers do submit 

the forms. 

IRS has reengineering efforts underway to improve the Questionable Form W-4 

database, which we discuss in our report to Representative Gallegly. Based on 

information from program officials, these efforts were being implemented when we 

were preparing this report. Although we did not assess IRS’s reengineering plans, it 

was not clear to us that the plans would address the data reliability concerns we 

discussed in this report and in our report to Representative Gallegly. The 

reengineering efforts address database improvements to enhance compliance checks. 

In addition to summarizing our concerns, our letter to Representative Gallegly 

contains details of the scope and methodology of the work that we performed from 

October 2002 through June 2003 in accordance with generally accepted government 

auditing standards. 

1

Treasury Inspector General for Tax Administration, Improvements to the Questionable Form W-4 

Program Are Needed to Determine Program Impact on Taxpayer Compliance, Reference Number: 

2003-40-006 (Washington, D.C.: October 2002). 

Page 2 GAO 04-79R IRS’s Questionable Form W-4 Program 
Conclusions and Recommendation 

We have questions about the value and fairness of using the Questionable Form W-4 

program database for compliance purposes because of uncertainties about the extent 

that the data are complete and current. 

Because of these questions we recommend that you assess the value of IRS’s 

Questionable Form W-4 program and determine whether the program should 

continue in its current form. 

Agency Comments and Our Evaluation 

On October 28, 2003, we received comments from the Commissioner of Internal 

Revenue on a draft of this report. The Commissioner agreed with our 

recommendation, stating that he will undertake a comprehensive review of the 

Questionable Form W-4 Program to determine its effectiveness and relevancy in the 

current environment. Further, he said that the Commissioner of the W&I Division is 

to lead the effort. The Commissioner’s comments are reprinted in enclosure 2. 

- - - - -

This report contains a recommendation to you. The head of a federal agency is 

required by 31 U.S.C. 720 to submit a written statement on actions taken on this 

recommendation. You should send your statement to the Senate Committee on 

Governmental Affairs and the House Committee on Government Reform within 60 

days after the date of this report. A written statement also must be sent to the House 

and Senate Committees on Appropriations with the agency’s first request for 

appropriations made over 60 days after the date of this report. 

We are sending copies of this report to the Secretary of Treasury and to interested 


congressional committees. This report will also be available at no charge on GAO’s 


Web Site at http:www.gao.gov. 


If you have any questions about this report, please contact me at (202) 512-9110 or by 


E-mail at whitej@gao.gov. Key contributors to this assignment were Charlie Daniel 


and Arthur L. Davis. 


Sincerely yours, 


James R. White 


Director, Strategic Issues 


Enclosures 


Page 3 GAO-04-79R IRS’s Questionable Form W-4 Program 
Enclosure 1: Report to Representative Elton Gallegly 


Page 4 GAO 04-79R IRS’s Questionable Form W-4 Program 
Page 5 GAO-04-79R IRS’s Questionable Form W-4 Program 
Page 6 GAO 04-79R IRS’s Questionable Form W-4 Program 
Page 7 GAO-04-79R IRS’s Questionable Form W-4 Program 
Page 8 GAO 04-79R IRS’s Questionable Form W-4 Program 
Page 9 GAO-04-79R IRS’s Questionable Form W-4 Program 
Enclosure 2: Comments from the Internal Revenue 

Service 

Page 10 GAO 04-79R IRS’s Questionable Form W-4 Program 
(450248) 

Page 11 GAO-04-79R IRS’s Questionable Form W-4 Program 
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