GAO-03-913R Reliability of IRS’s Form W-4 Information 

United States General Accounting Office

Washington, DC 20548 

September 15, 2003 

The Honorable Elton Gallegly 

House of Representatives 

Subject: Reliability of Information on Taxpayers Claiming Many Withholding 

 Allowances or Exemption from Federal Income Tax Withholding 

Dear Mr. Gallegly: 

When taxpayers claim more withholding allowances than they are entitled to or 

improperly claim exemption from withholding, either no tax or too little tax is 

withheld from their wages. As a result, some taxpayers end up owing the Internal 

Revenue Service (IRS) additional taxes, and if the taxes are not paid on time, they 

become delinquent. This report responds to your request for information on these 

taxpayers. 

Specifically, you asked that we provide you with information on (1) how many 

taxpayers claimed more than 10 allowances for federal income tax withholding 

purposes and (2) how many taxpayers claimed exemption from federal income tax 

withholding and, of those taxpayers, what proportion did not file federal income tax 

returns and had invalid Social Security numbers. However, because of concerns 

about the completeness and currency of the information reported to IRS on taxpayers 

who claimed more than 10 withholding allowances or taxpayers who claimed 

exemption from withholding, we could not use it to respond to your questions. This 

report discusses why we could not use IRS’s information to answer your questions 

and briefly describes IRS’s proposals to help address this problem. To perform our 

work, we analyzed information from IRS’s Questionable Form W-4 database1

 and 

interviewed IRS officials responsible for managing the Questionable Form W-4 

program. Further details on our scope and methodology are provided later in this 

report. 

Results in Brief 

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 preclude us from using it to answer your questions. First, we are 

concerned about the completeness of the information because a significant number 

of employers may not send IRS the required forms. Second, some of the information 

may not be current—it may not reflect the current withholding status of some 

 

1

This refers to IRS’s Questionable Form W-4 Case Control System. 
Page 2 GAO-03-913R Reliability of IRS’s Form W-4 Information 

taxpayers. While acknowledging the limits of the information for answering your 

questions, IRS officials told us that the information is useful for tax compliance 

purposes. Also, the officials said that IRS has efforts under way intended to influence 

employers to comply with the reporting requirement. IRS provided oral comments on 

a draft of this report stating that it generally agreed with our findings. IRS’s 

comments are summarized later in this report. 

Background 

Section 3402 of the Internal Revenue Code requires employers to withhold income 

tax from wages and other forms of income. It outlines the basis for claiming 

withholding allowances or exemption from withholding and specifies the general 

content of the IRS Form W-4—Employee’s Withholding Allowance Certificate (Form 

W-4) that employees submit to employers when making their withholding allowance 

claims. 

Each employee is required to submit a completed Form W-4 to his or her employer. 

Employees are to use the worksheet attached to the Form W-4 to determine the 

number of withholding allowances they should claim. The worksheet’s instructions 

consider, among other things, a taxpayer’s filing status, number of dependents he or 

she claims on the tax returns, and eligibility for the child tax credit. For example, a 

married taxpayer filing a joint tax return who has four dependent children and large 

itemized deductions may be eligible to claim more than 10 allowances. Some 

taxpayers not claiming a specific number of allowances may claim exemption from 

federal income tax withholding. Generally, taxpayers can claim exemption from 

withholding if they had no tax liability for the previous year and expect to have none 

in the current year. 

Treasury regulations2

 require that employers send IRS “questionable Form W-4s.”3

According to IRS, a questionable Form W-4 is any Form W-4 on which a taxpayer 

claims more than 10 withholding allowances or claims exemption from withholding 

with over $200 per week in wages. The information that IRS receives from employers 

on questionable Form W-4s is maintained in the Questionable Form W-4 database. 

IRS uses information in the database to identify potential noncompliance with its 

withholding guidelines. IRS’s tax examiners at the Fresno Computing Center review 

selected questionable Form W-4 cases to determine if the withholding is appropriate 

based on the taxpayer’s filing history and may contact the taxpayer if additional 

information is needed to substantiate the withholding allowances claimed. If the tax 

examiners determine that the withholding allowances claimed are incorrect or if 

taxpayers do not respond to IRS contacts, the tax examiners mail “lock-in” letters to 

the taxpayers’ employers directing them to disregard the taxpayers’ Form W-4s as 

filed and to withhold at the rate for a single person with zero allowances or at some 

other rate determined by the tax examiners. 

 

2

Treasury Regulation §31.3402(f)(2)-1(g)(1)-(2). 

3

If a new employee does not give the employer a completed Form W-4, the employer is to withhold tax 

as if the employee is single, with no withholding allowances. 
Page 3 GAO-03-913R Reliability of IRS’s Form W-4 Information 

Findings 

Because of concerns about the completeness and currency of the information in IRS’s 

Questionable Form W-4 database, we cannot respond to your questions. According 

to our guidance for assessing the reliability of computer-processed data,4 we cannot 

use data that are significantly incomplete, inaccurate, and not up to date and 

subsequently could lead to an unintentional or incorrect message. 

We are concerned about whether the information in IRS’s Questionable Form W-4 

database is sufficiently complete because some employers likely do not send IRS 

withholding information on employees who claim more than 10 allowances or claim 

exemption from federal income tax withholding, as required. IRS program officials 

told us that they do not know the extent to which employers might not be sending in 

questionable Form W-4s.5 However, IRS’s analysis of large employers with 1,000 or 

more employees that sent in questionable Form W-4s provides some evidence that a 

significant number of large employers may not be reporting Form W-4 information to 

IRS. This analysis showed that 25 percent of the employers with 1,000 or more 

employees in its Large and Medium-Size Business (LMSB) and Small Business/SelfEmployed (SB/SE) divisions that filed employment tax returns in tax year 2001 sent 

in questionable Form W-4s to IRS (1,933 of 7,713 employers). Similarly, 16 percent of 

the employers with 1,000 or more employees in IRS’s Tax Exempt/Government 

Entities Division had submitted questionable Form W-4s (610 of 3,888 employers). 

Although the number of questionable Form W-4s IRS might receive from individual 

employers can vary, we question whether 75 percent of large employers with 1,000 or 

more employees in IRS’s LMSB and SB/SE divisions could have no employees who 

submitted questionable Form W-4s. Information from IRS showed that IRS received 

about 800,000 questionable Form W-4s from 33,000 employers in calendar year 2002 

or, on average, about 25 forms from each employer who submitted. This average 

includes many employers with fewer than 1,000 employees. 

Under current law, IRS does not have statutory authority to impose a penalty to 

enforce employer compliance with the reporting requirement. The reporting 

requirement was promulgated in Treasury regulations. 

In addition, IRS’s questionable Form W-4 database may not accurately reflect the 

current withholding status of some taxpayers. In particular, if an employee who 

previously claimed more than 10 allowances or claimed exemption 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. This is because employers are only required to send 

 

4

U.S. General Accounting Office, Applied Research and Methods: Assessing the Reliability of 

Computer-Processed Data (External Version 1), GAO-03-273G (Washington, D.C.: October 2002). 5

IRS conducted questionable Form W-4 compliance checks in the 1980s based on a representative 

sample of 3,331 employers. Less than 50 percent of the questionable Form W-4s received by employers 

were reported to IRS. 
Page 4 GAO-03-913R Reliability of IRS’s Form W-4 Information 

questionable Form W-4s to IRS.6

 There is no requirement for employers to forward to 

IRS new Form W-4s that do not meet the questionable Form W-4 criteria. 

IRS officials acknowledged the limitations of IRS’s Questionable Form W-4 database 

for answering your questions. However, the officials said that the database provides 

IRS with useful leads in determining possible underwithholding issues that may lead 

to noncompliance. They told us that they use the database for identifying taxpayers 

who may be underwithholding taxes since those taxpayers also may not file tax 

returns. IRS’s tax examiners review certain questionable Form W-4s to substantiate 

taxpayers’ withholding claims.7 When the taxpayers’ claims cannot be substantiated, 

the tax examiners issue “lock-in” letters to both the taxpayers’ employers and the 

taxpayers stating that the taxpayers’ withholdings are to be adjusted based on IRS’s 

investigation. 

We asked IRS officials if they had plans to improve employers’ compliance with the 

reporting requirement. IRS officials told us that they have initiated reengineering 

efforts to improve the existing system and database, allowing them to, among other 

things, improve the integration of other compliance databases to detect 

noncompliance and expedite the issuance of lock-in letters. In February 2003, all of 

IRS operating divisions and a panel of external stakeholders participated in a Form 

W-4 compliance summit. During the summit, the participants identified a number of 

suggestions to improve employer and taxpayer compliance with withholding 

requirements, including improvements to forms, on-line information, and services 

such as W-4 calculator and development of frequently asked questions for IRS’s Web 

site. The officials also said that IRS’s divisions will continue to work together to 

identify outreach and educational strategies to educate employers, stem 

noncompliance, and encourage voluntary employer reporting of potential abusive 

schemes related to withholding evasion. Because the activities were new or being 

implemented, we did not evaluate them to determine their effectiveness in improving 

employers’ compliance with the reporting requirement. 

Concluding Observations 

Considering what we learned about the reliability of the data, questions may be raised 

about the value of IRS’s efforts to maintain the Questionable Form W-4 database. For 

this reason, we are sending a separate letter to the Commissioner of Internal Revenue 

describing what we learned and recommending that he assess whether IRS’s 

Questionable Form W-4 program should continue in its current form. 

Agency Comments and Our Evaluation 

We asked IRS to provide us oral comments on a draft of this report. On August 27, 

2003, we received comments from the Director of Filing and Payment Compliance, 

Wage and Investment Division. The Director generally agreed with our findings and 

 

6

The database also includes information on employees whose questionable Form W-4s were reviewed 

by IRS tax examiners and were subsequently adjusted to levels below the criteria for submission to 

IRS. 

7

IRS’s tax examiners were reviewing cases of taxpayers who have histories of noncompliance, that is, 

nonfilers and balance due taxpayers. 
Page 5 GAO-03-913R Reliability of IRS’s Form W-4 Information 

acknowledged the limitations of the Questionable Form W-4 database in providing 

information we could use to respond to your questions. IRS stated that although the 

database did not meet our standards for responding to your questions, it believes that 

the database serves its intended purpose of housing data to facilitate its efforts to 

address underwithholding at its source, thereby increasing compliance early and 

preventing future delinquencies that can be both costly for IRS to resolve and 

burdensome to taxpayers. The comments also stated that reengineering efforts were 

recently initiated to improve the Questionable Form W-4 program as we mentioned 

earlier in our report. 

Scope and Methodology 

To perform our work, we interviewed IRS’s W&I Operating Division staff, who were 

responsible for managing the Questionable Form W-4 program, and IRS Detroit 

Computing Center staff, who were responsible for maintaining the Questionable 

Form W-4 database. Based on these contacts, we obtained an understanding of how 

the program operates, determined how IRS monitors employers’ compliance with 

Form W-4 reporting requirements to help us assess the reliability of the Questionable 

Form W-4 database, and obtained relevant documentation. 

We analyzed IRS’s Questionable Form W-4 database to determine what information 

IRS maintains on taxpayers who claimed more than 10 withholding allowances or 

claimed exemption from federal income tax withholding. According to IRS, the 

database primarily covers a 4-year period. The database we reviewed primarily 

covered tax years 1998-2002. We assessed the reliability of IRS’s Questionable Form 

W-4 database by performing electronic testing, reviewing existing information about 

the data and the system IRS created, and interviewing agency officials knowledgeable 

about the data and the system. As stated in the report, we determined that the data 

were not sufficiently reliable to answer your questions. 

In addition, we reviewed various IRS documents and publications pertaining to tax 

withholding that indicate the responsibilities of taxpayers and employers. We also 

reviewed IRS and Treasury Inspector General for Tax Administration reports related 

to IRS’s questionable Form W-4 program. We conducted our work from October 2002 

through June 2003 in accordance with generally accepted government auditing 

standards. 

- - - - - 

We are sending copies of this report to the Commissioner of Internal Revenue and 

other interested parties. We will make copies available to others upon request. This 

report will also be available at no charge on GAO’s Web site at http://www.gao.gov. 
Page 6 GAO-03-913R Reliability of IRS’s Form W-4 Information 

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 report were Charlie Daniel and 

Arthur L. Davis. 

Sincerely yours, 

James R. White 

Director, Strategic Issues 

(440170)