The Siren Song of Deferral Through the Income Tax Withholding Forms

Abstract

This Article points out the legal and ethical exposure American workers’ and retirees’ preparation of tax withholding forms presents when they seek to take advantage of a tax payment deferral technique the forms so readily offer. It details three withholding settings and how each presents potential legal risk for the worker or retiree. Two of the settings exploit a frequently touted safe harbor that allows withholding to occur very late in the year to eliminate penalties that normally apply for not having paid the taxes earlier in the year. This safe harbor presents a multi-billion-dollar time-value-of-money loss to the government. Besides legal risk for Americans who inaccurately complete the forms, this Article argues that the tax ethics and nascent tax-related Environmental, Social, and Governance (“ESG”) literature has not yet judged the behavior of those who delay a tax payment (even when done in full legal compliance), as opposed to those who engage in tax avoidance or evasion. It also argues that the government’s approach to withholding and its inconsistent and confusing forms are tantamount to the government becoming complicit in Americans’ deficient submissions. In some cases, the government is laying a perjury trap, especially for Americans in financial straits looking to their withholding form as a lifeline. The 2022 increase in the information that retirees must provide on their forms, now matching the details employees have always provided, expands prosecutorial reach to retirees. This Article offers numerous recommendations to improve the withholding process and forms to reduce the temptation to engage in the criticized behavior.