Letter to IRS all that's needed to explain added exemptions

March 18, 2001|By Liz Pulliam Weston | Liz Pulliam Weston,LOS ANGELES TIMES

I make $145,000 a year and my spouse does not work. We have three children and a sizable mortgage. We're receiving a combined federal and state tax refund of about $12,000 for 2000. I'm not thrilled about making no-interest loans of that size to the government. I'd really like to reduce my withholding, but I've repeatedly been told - always in ominous tones - that going above 10 exemptions means "you have to tell the IRS." I've reached the point where my response is, "So what?" At more than 10 exemptions, do we become prime targets for an audit? How can it be worse than enduring cash-flow problems all year long?

You don't say so, but it's probably the folks in your payroll department giving you the "ominous tones" rather than any tax specialist you consulted. A tax professional would know that this is one of the few cases in which the IRS' bark is much worse than its bite.

If you take more than a certain number of exemptions - the IRS won't specify the threshold, but nine is the generally understood limit - you'll get a letter from the IRS asking why. You simply need to respond with a letter outlining your situation, just as you did above. If you want, you can hire a tax pro to write the letter for you, but it's really not necessary.

Some workplace payroll departments have confused this simple contact by the IRS with a full-fledged audit and try to scare people away from taking the appropriate withholding. But it's ridiculous to give the government money you're not required to - let alone an extra $1,000 a month.

Your high income makes you a somewhat more likely candidate for IRS scrutiny than the average taxpayer. But as long as your deductions are legitimate, if you report all your income and you keep your paperwork in order, you shouldn't need to sweat an IRS review.

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