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-- Posted: Oct. 27, 1999

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

Don't kid around with the IRS

Dear Dollar Diva,
What is the penalty for claiming more dependents than you actually have if you get caught by the IRS? I've heard that a lot of people change their withholding allowances from their actual, say, two dependents to 50.

You heard wrong. There is a 75 percent penalty on any underpayment of taxes that is due to fraud. This keeps most people from claiming more dependents than they actually have.

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However, if you think you are having too much tax withheld from your paycheck, you can legitimately reduce that amount by increasing your withholding allowances on Form W-4. If you plan to do any of the following, you might be able to increase your withholding allowances and decrease your withholding tax:

  • File as head of household

  • Claim a child or dependent care credit

  • Claim a child tax credit

  • Itemize, instead of taking the standard deduction

  • Claim adjustments to income, such as alimony, student loan interest or a deductible IRA

The instructions on Form W-4 will walk you through the steps to come up with the correct withholding allowances for your tax situation. Visit the IRS Web site to retrieve this form.

It's a good idea to go through the steps on the Form W-4 and have your withholding adjusted for the following year if you're not happy at tax time because:

  • Too much tax was withheld and you are receiving a large refund, or

  • Not enough tax was withheld and you have to pay a large tax bill.

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