Simple or not, W-4s can prove painful. (Payroll).

One of the simplest tasks a new employee undertakes -- filling out his or her W-4 form -- can cause sticky problems for both employee and employer if not done correctly. Experts say companies need to pay close attention, especially when workers claim a plateful of exemptions.

Problems can start right with the basics -- the employee's correct full name and Social Security number, said Scott Mezistrano, manager of government relations, American Payroll Association, speaking on a recent Tax Talk Today[R] Internet broadcast. "It's important that both are correct, to save time for everyone, to avoid penalty and to ensure that the employee gets his or her retirement benefits."

Panelists on the program confirmed that it is not a violation of privacy laws for the employer to ask to see and even photocopy the employee's Social Security card, to make sure everything is accurate.

Payroll managers should allow employees to change withholding at any time. On the other hand, payroll managers are not required to accept W-4s they know to be invalid, because of statements made by the employee, illegal alterations or the use of the W-4T. if employers think a form is "questionable," they can send it to the IRS for examination, but they have to process payroll according to that W-4 until a decision is made.

"In the past 12 months, we've received 840,000 questionable W-4s from employers. But we still think we're missing some," said Stephen Barnes, operations manager for Collections at the IRS Compliance Center. "We need help from employers in finding people who are using the firm to circumvent the tax system." According to Barnes, a red flag goes up with the IRS when an employee claims more than 10 exemptions. Employers should place those forms in the "questionable" category, he said.

Penalties are possible for both parties. The employee can be fined $500 for submitting a fraudulent W-4. When the IRS responds to a questionable WA and informs the employer what "lock-in" withholding rate should be set, the company can incur heavy fines for not complying.