Failure to Withhold 20%

[goldtpa]

What is the penalty for not withholding the mandatory 20%. A client did not withhold the mandatory 20% for a distribution that occured in 2003. The accoutant is blaming me for not being more communicative. We just found out about it.

[Belgarath]

It may make a difference if they are subject to electronic transfer requirements or not. I'd start with IRC 6656 and 6672 for your basic information. Unfortunately, that's about the extent of my knowledge in this area, and some other folks here can probably provide you with helpful details.

[goldtpa]

Thanks for the advice. I start looking at those sections.

[Guest ActuaryWannabe]

From the ERISA Outline Book Chapter 7-VI-F:

2. Collection steps. If the required withholding has not been deducted from a plan distribution, the

withholding party should make reasonable attempts to collect the withholding amount from the recipient

of the distribution. If future distributions will be made to the recipient, the make-up withholding could

be recovered from those distributions. To avoid the penalty under §6651(see the discussion in Part E.

of this section), the withholding party may need to pay the underwithholding with Form 945, and seek

a refund following the recipient's payment of the tax, or request a waiver of the penalty with the Form

945 filing.

I have submitted some 945's where the underwithholding was not our fault, and at the request of the plan sponsor, have not requested a waiver or mentioned that underwithholding occurred. Not that I would advise to do that, but so far, no repercussions. I wonder how closely they monitor that. Maybe only if there is a tax payment problem on the part of the former participant. I would be interested if anyone has had a different experience.

[alanm]

The IRS does not review each 1099 attached to the 945. As long as the totals match, you probably won't hear from them. If you failed to withhold and that participant does not pay their tax with the 1040 and they are audited and are unable to pay the tax, you will be held liable for the tax by the IRS. The 1099s are scanned in for the purpose of matching reportable income on the 1040 and for crediting withholdings to the tax payer.