Corrected W-2 shows less withholding

[dmj4]

Client received a 2017 W2-C that decreased his withholding by more than $12,000. We will file an amended return. Will IRS assess penalties on TP, even though he just received the W2-C? If you think they will, can I ask for no assessment of penalties with the 1040X or do I need to wait until they are assessed and then ask for abatement?

Thank you so much for your time.

[Jiggers]

I would want to know why there is a decrease in Withholding by $12,000. Who made the mistake?

[kathyc2]

I would want to know why there is a decrease in Withholding by $12,000. Who made the mistake?

As would I. My first thought is that client is a principal in a corp that is delinquent in paying payroll tax and someone figured out that 1040 penalties are less than fiduciary penalties.

[Rapid Robert]

While not 100% sure, I think the IRS does not assess failure to pay penalties on an amended balance due if you pay it with the return, or when the IRS sends a bill. And even if they did, you could probably use First Time Abatement.

There might be (probably will be) an accuracy related penalty. I think you have to wait for it to be assessed before asking for reasonable cause abatement.

That there will be an interest charge, I have no doubt.

[dmj4]

It is just a W-2 from where he works that was corrected. The payroll company states the reduced withholding is due to not collecting the $12,000+ when he exercised the stock options that are reported in boxes 1 and 12 (Code V) of his W-2.

[dmj4]

I would want to know why there is a decrease in Withholding by $12,000. Who made the mistake?

It appears the payroll company made the mistake.

[Rapid Robert]

It appears the payroll company made the mistake.

I tried to answer your question in my previous post. Since exercising stock options is not a normal payroll transaction, and does not necessarily involve any cash paid at all (if a cashless exercise), I can understand how someone thought the withholding might have been collected from the taxpayer and paid in by the employer, only to find out later that it actually was not. Two different departments.

[Jiggers]

Two departments are not, someone didn't reconcile the payroll reports, W-2's, and payroll tax deposits?

[dmj4]

Something smells odorous here.
If the payroll company failed to collect the required taxes related to the stock option exercise, that it a (likely) error.
(Was the Code V information shown on the original W2 ?)
BUT how did the payroll company make Error #1 above, and then somehow proceed to Error #2, namely reporting $12k in tax withholding which (apparently) never occurred??

I would suggest the employee review, very carefully, his payroll stubs for the year involved.

FE

Yes, the Code V amount was on the original W-2. I have asked the client to review his paystubs and paperwork regarding the transaction.

[Rapid Robert]

Two departments are not, someone didn't reconcile the payroll reports, W-2's, and payroll tax deposits?

Not sure why that is so hard to believe.

[dmj4]

While not 100% sure, I think the IRS does not assess failure to pay penalties on an amended balance due if you pay it with the return, or when the IRS sends a bill. And even if they did, you could probably use First Time Abatement.

There might be (probably will be) an accuracy related penalty. I think you have to wait for it to be assessed before asking for reasonable cause abatement.

That there will be an interest charge, I have no doubt.

Thank you!

[Snaggletooth]

Withholding via Stock Shares

Two departments are not, someone didn't reconcile the payroll reports, W-2's, and payroll tax deposits?

A reconciliation such as this may not be forthright if the withholding was made via shares of stock. A typical exercise of 100 shares often results in a company taking out 30 shares for withholding to pay federal tax withholdings and social security. The recipient W-2 is taxed on the value of 100 shares but receives only 70 shares, and the value of 30 shares shows up on the W-2 as taxes withheld.

None of this results in cash transactions for the recipient, although the company has to pay a tax deposit for the value of the 30 shares. Transactions such as this can easily escape traditional payroll reconciliations by persons not acquainted with the nuts and bolts of stock option exercises.

The probable result, however, would most likely result in over reporting by $12,000 when corrected, instead of underreporting. Like Kathy, I'm suspicious that the company is trying to avoid payments or penalties.

[JohnH]

Most of the time when I've seen a large company issue a corrected W2, they offer to reimburse the employee for costs of preparation of amended returns. It would seem reasonable that the company would be willing to reimburse for any penalties or interest resulting from amending as well.

Surely the client has a sense of whether such a request would be acceptable (with no retaliation or other adverse reaction from the employer). I'm thinking that someone earning enough that a $12,000 ERROR in their withholding doesn't set off all sorts of alarm bells surely must be high enough in the company to have a sense of how management might react to such a request. Unless they're just totally clueless about how organizations work at the unofficial level.

[dmj4]

A reconciliation such as this may not be forthright if the withholding was made via shares of stock. A typical exercise of 100 shares often results in a company taking out 30 shares for withholding to pay federal tax withholdings and social security. The recipient W-2 is taxed on the value of 100 shares but receives only 70 shares, and the value of 30 shares shows up on the W-2 as taxes withheld.

None of this results in cash transactions for the recipient, although the company has to pay a tax deposit for the value of the 30 shares. Transactions such as this can easily escape traditional payroll reconciliations by persons not acquainted with the nuts and bolts of stock option exercises.

The probable result, however, would most likely result in over reporting by $12,000 when corrected, instead of underreporting. Like Kathy, I'm suspicious that the company is trying to avoid payments or penalties.

This is interesting, thank you for that information.

[dmj4]

Most of the time when I've seen a large company issue a corrected W2, they offer to reimburse the employee for costs of preparation of amended returns. It would seem reasonable that the company would be willing to reimburse for any penalties or interest resulting from amending as well.

Surely the client has a sense of whether such a request would be acceptable (with no retaliation or other adverse reaction from the employer). I'm thinking that someone earning enough that a $12,000 ERROR in their withholding doesn't set off all sorts of alarm bells surely must be high enough in the company to have a sense of how management might react to such a request. Unless they're just totally clueless about how organizations work at the unofficial level.

They are supposed to be sending a letter that did not make it in with the copy of the corrected W-2.