Mistakenly filed as Exempt from income tax witholdings for entire year 2019

Question

I am a basic 30 year old filing Single, W2, healthy working individual. No dependents, no additional schedules, capital gains or losses other than Student Loan interest expense.

I started a new job in January 2019 and somehow during my new hire enrollment, "I or someone" marked in my file as Exempt... I am pretty familiar with filing my own 1040 (as its pretty basic)and I know for a fact that I would never for under any reason think that I am Exempt from absolutely anything tax related. Nobody in my new job's HR department reached out to confirm whether this Exemption was correct or not with me personally. My CPA said that anytime they receive an Exempt W-4 form, that they automatically return the form to the employer to confirm.

I unknowingly went 11 full months in 2019 without any taxes being withheld. Of course my paycheck was more than before, but I also got a better/higher salary job, so I never thought about the difference being from not paying taxes. And, no I do not print out my paystubs. It’s all through Paycom and it clearly shows you your gross pay & a "$XXX" amount in deductions/withholdings - kicker is, you have to click the drop down menu to actually see the entire breakdown. At which point, I never saw the big $0 in taxes being withheld... I know the taxes have to be paid one way or another, but I don't feel like I should be entirely responsible for a $5k-$6k tax liability for a HR clerical error. Even if I did actually input it incorrectly the first time.

Is there a way to check with the IRS to see if they indeed receive my file as Exempt and if they did actually return it to my Employer? I’m just wondering if either HR forgot to follow up with me or even IF the IRS does actually cull these exempt requests in the first place? I don't have the liquidity to simply pay the IRS all at once.

What would be my best option going forward?

Answer 1

First, let me clear up a misunderstanding in your question.

Is there a way to check with the IRS to see if they indeed receive my file as Exempt and if they did actually return it to my Employer? I’m just wondering if either HR forgot to follow up with me or even IF the IRS does actually cull these exempt requests in the first place?

The W-4 form does not go to the IRS. The information you put on your W-4 is used by your company’s payroll department to figure out how much tax they need to withhold from your check. When your CPA said that when they “receive an Exempt W-4 form, that they automatically return the form to the employer to confirm,” I believe that he was talking about the fact that for those companies where he handles the payroll, he flags the ones marked exempt for review. The IRS never gets notified when an employee marks exempt.

You would hope that someone in the payroll department would have noticed this and asked the question. But ultimately, it is your responsibility to ensure that your paycheck is correct. Yes, you should be looking at the paystubs. Otherwise, how do you know that they are even giving you the right salary? How do you know that they are putting the right amount into retirement? Etc.

Yes, the taxes are yours to pay. There will also be underpayment penalties charged. Now, if you can prove that you filled out the W-4 form correctly and that taxes were not withheld due to some sort of clerical error, you might be able to talk your employer into reimbursing you for the penalties. But ultimately taxes are your responsibility, and this error should have been caught by you after the first paycheck.

If you don’t have the cash on hand for your large tax bill, you can set up a payment plan with the IRS.

Answer 2

The total tax you will pay over the course of the year [from withholdings + a final tax bill] is based on your income, not your source deductions. Whether your deductions are correct or not will not impact the total amount of tax you pay.

So you say you "I don't feel like I should be entirely responsible for a $5k-$6k tax liability for a HR clerical error". But that $5k is the same $5k you would have paid over the year. As mentioned in the comments to your question, there is a chance that the IRS may apply penalties for underpayment, but that will depend on some other factors. When you file your taxes, use this link to research the best way for you to apply for a payment plan: https://www.irs.gov/payments/payment-plans-installment-agreements.

It is unfortunate that you may not have the cash available to pay this bill immediately, and it is also true that you might have restrained your spending during the year had you known this bill was coming - but whoever filled that form out will not take responsibility for you having to pay your rightful amount of tax for the year.

Answer 3

First off, it's your money. Nobody has as much of a vested interest in your finances as you. Nobody will look after your money for you on your behalf better than you. It is your job to check for these kinds of mistakes and correct them.

Having said that, now that you have found the mistake and corrected it, going forward you will have learned a valuable lesson and this will never happen again for you.

When you report on your income tax form that you had no tax deducted at source, the IRS will want you to pay that amount. Given the size of the amount owing, you may be able to negotiate a monthly or quarterly payment plan.

Not withholding taxes at source can be a boon to your financial future. If it is possible for you to live on an amount that doesn't include the withholding taxes and you don't already have a retirement account set up with your employer, you can contribute up to $6,000/yr in the U.S.A. to your registered retirement account. The contribution will reduce your net income for tax purposes, reducing the amount owed at tax time. It's like getting your tax refund early and dropping it into a registered retirement account all year. Note that this strategy is not for everyone. If your contribution room is low or you need the money to fund your life this won't apply.