Getting a lock-in letter from the IRS can be an unexpected and confusing situation for both employees and employers. A lock-in letter is an official notice from the IRS that requires the employer to make an adjustment to an employee’s federal income tax withholding. The IRS usually serves a lock-in letter when it believes that the employee is not paying enough federal income tax. The instructions of the letter often override the information provided on the employee’s W-4 form.
For employees, failing to handle a lock-in letter properly may result in consequences such as increased withholding, penalties to the employer, and even further IRS audits. On the other hand, if an employer fails to handle a lock-in letter properly, they may be held liable for the under-withholding, face penalties and fines, or public reputational damage. Overall, whether you’re an employer or an employee, it is essential to understand what a lock-in letter is and what steps to take when you receive one to avoid unnecessary tax penalties.
To avoid costly mistakes when you receive an IRS lock-in letter, it’s best to consult with an experienced tax lawyer to guide you. With over 10 years of experience, our tax attorneys at Victory Tax Lawyers have all it takes to help you understand your lock-in letter and identify the right steps to take to avoid tax penalties. Schedule a free attorney consultation with us today; let’s discuss your tax issue and help you find the appropriate solution immediately.
In this comprehensive guide, you’ll learn what an IRS lock-in letter implies for both employers and employees and how to find your way around it.
What Is a Lock-In Letter From the IRS?
An IRS lock-in letter is an IRS notice sent to an employer to tell them to withhold federal income tax from an employee’s wages at a higher rate. The IRS issues this notice when it determines that the employee is under-withholding taxes, meaning their paycheck does not have the right amount of tax taken out. The lock-in letter spells out the withholding allowances the employer must use, and it often overrides the employee’s Form W-4.
Lock-in letters from the IRS make sure that the federal income tax withholding from an employee’s wages is enough to avoid underpayment. If you receive a lock-in letter from the IRS, you typically have a limited time (usually 60 days) to respond or contest the decision with the IRS before the withholding change begins to apply.
Types of Lock-In Letters
The IRS issues different versions of lock-in letters to either the employer or the employee and at different stages. Let’s look at the different lock-in letters and what they mean:
- The IRS 2802c letter is a self-correcting letter that an employee receives when the IRS finds out that their withholding does not comply with IRS guidelines. The IRS issues Letter 2802c to help you avoid receiving a lock-in letter in the future. If you get this letter, you can use the Tax Withholding Estimator that is provided by the IRS to calculate your correct withholding amount. Then, fill out a new W-4 form with the correct withholding details and give it to your employer.
- The IRS lock-in letter 2800C is issued to the employer to let them know how to change an employee’s federal income tax withholding. It comes with a copy for the employee, and you have 60 days from when the letter is given to implement the specified changes. In a case where the employee no longer works for you, you don’t have to do anything, but it’s also recommended to keep your copy of the letter for records’ sake. However, if the employee comes back to work within 12 months of getting the letter from the IRS, you should implement the withholding arrangement permitted in the letter.
- The IRS lock-in letter 2801C is issued to the employee. If you get this letter, the IRS is saying that you are not entitled to claim exempt status or more than a specified number of withholding allowances. You can appeal the decision within 30 days from the date of the letter. The IRS then considers why you think you should have a different withholding rate or number of withholding allowances. After the 30 days, the employer is given 30 more days to make changes to the employee’s withholdings.
- The IRS lock-in letter 2808C is sent to either the employer or the employee to notify them of any modifications to the initial lock-in instructions. The letter explains the reasons for the modification and states whether the IRS has increased or decreased the employee’s withholding allowances. Unlike the lock-in letter 2800C, this letter takes effect immediately and not in 60 days.
What Triggers an IRS Lock-In Letter?
Your employer is likely to receive an IRS lock-in letter when the IRS believes that you are not having enough federal income tax withheld from your paycheck. According to the IRS, the lock-in letter states the maximum number of withholding allowances the employee is allowed to claim. Employers have to withhold taxes in the exact way it was spelled to them in the lock-in letter and by the deadline given, unless the IRS says otherwise. The date is usually 60 days from when the letter is issued. Once the lock-in rate is set in motion, an employer cannot reduce the withholding unless the IRS approves it.
Employees are typically required to fill out Form W-4 to determine how much tax should be withheld from their paychecks. Now, if you claim too many allowances, such as listing multiple dependents or choosing a higher withholding exemption than you actually qualify for, you may end up with too little tax being withheld. Over time, when the IRS notices this and sees that you’re constantly owing taxes when filing, they may target you for a lock-in letter to correct the withholding rate. The idea is to make sure that the correct amount gets taken from your paycheck in the future.
Another thing that could lead to you being issued a lock-in letter is years of unpaid federal income taxes. If you have back taxes from previous years, the IRS will try to correct this by making sure it takes enough money from your future wages to cover the debt. They will achieve this by issuing a lock-in letter to increase the withholding tax amount from your wages. That way, your future withholdings are sufficient not only for the current year’s taxes, but also to help repay any back taxes owed.
Note that the IRS takes tax fraud and evasion seriously. If you intentionally provide incorrect information on your Form W-4 to reduce your tax liability, the IRS may just issue you a lock-in letter. An example is when you attempt to claim exemptions you are not entitled to or deliberately underestimate your income.
If the IRS reviews your tax history and detects any suspicious or fraudulent activity, it will take action. In such cases, the lock-in letter is issued to prevent you from further manipulating your withholdings and underpaying taxes. Even if you didn’t mean to commit fraud, the IRS could still send this letter if they spot mistakes in your returns or withholding details. It serves as a warning to encourage you to be more careful and accurate next time.
How Long Does a Federal Income Tax IRS Lock-in Letter Last?
When an employer receives an IRS lock-in letter for a federal income tax, the letter remains effective indefinitely until the IRS officially cancels it. This simply means that the employer has to stick to the federal tax withholding guidelines laid out in the letter for as long as the letter is still in effect. However, the employee who is affected by the new withholding rate can appeal to the IRS to lift or modify the lock-in letter. Although an appeal to have the lock-in letter modified only stands if the employee has shown compliance with the lock-in letter.
Is an IRS Lock-in Letter Bad?
No, an IRS lock-in letter isn’t necessarily bad. However, it’s a sign that there’s an issue with your federal income tax withheld. And while it’s not to be looked at as a penalty, it’s an indicator that you have a potential tax issue to address. That’s why you want to address it as soon as it lands on your desk.
For instance, if you leave it unanswered, the IRS-mandated income tax withholding might take a bigger chunk out of your paycheck, leaving you with less money to spend. It’s also the IRS’s way of helping you avoid harsher tax penalties in the future. So if you’ve received one, be grateful that you get the opportunity to correct any mistakes you may have in your withholding before they become bigger problems..
How Do I Get an IRS Lock-In Letter Release?
To be released from the Withholding Compliance Program, you have to pay your due taxes and file tax returns for three consecutive years. After three years, you can request the IRS to release you from the Withholding Compliance Program. If they approve your request, the IRS will issue a 2813C letter to your employer letting them know about your release. Once that happens, you can fill out and submit a new Form W-4. Let’s look at the specific steps you can take to apply for a lock-in letter release:
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Start by reviewing the lock-in letter, as it explains why the IRS issued the lock-in in the first place and the changes they expect your employee to make.
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If you disagree with the IRS’s decision about withholding, you can reach out to them and give updated information. You may need to fill out a new Form W-4 and provide supporting documents like proof of dependents or changes in income, or send in your past tax returns to show them why the withholding amount should be different.
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Call the IRS using the number provided in the letter to explain your situation. While on the call, do well to explain any errors or special circumstances that you think could affect your tax situation.
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The IRS will review the information you’ve provided and may choose to either adjust or release the lock-in if they believe your facts are valid.
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To avoid mistakes that may affect your chances of getting the lock-in letter release, it’s best to reach out to an experienced tax attorney for professional guidance on how to go about this whole process.
How to Respond to an IRS Lock-In Letter?
For an employee, the first step is to carefully review the letter, understand why it was issued, and the specific changes the IRS wants to make. Then, evaluate your Form W-4. If you believe that the adjustments the IRS is proposing aren’t justified, gather supporting documents that can corroborate your claim, such as your updated tax returns, proofs of dependents, or other relevant documents that show the correct withholding rate based on your actual financial and family situation. If you think it’s necessary, complete a new W-4 form that accurately reflects your current tax situation.
After you’ve done these, call the IRS and explain why you think the withholding changes are unnecessary or incorrect. Be sure to do this within the response deadline. If your petition is successful, the IRS may cancel or adjust the lock-in letter. Otherwise, your employer will be legally required to uphold the withholding adjustments required by the letter.
For the employer, you’re required by law to follow the instructions in the IRS lock-in letter as they override the employee’s previous Form W-4 submissions. Review the letter to identify the required changes and when they should take effect. Even if the employee disagrees with the IRS’s decision or goes to contest it, you must still implement the withholding changes unless and until you receive a new directive from the IRS to modify or rescind the lock-in letter.
Need Help From a Tax Lawyer?
Since a lock-in letter can affect how much you pay in taxes as an employee, it’s important you understand what it means and how to handle it the right way. If you’re an employer, it’s crucial to know how a lock-in letter works. This knowledge helps you avoid tax penalties and better address your employees’ financial needs. That’s why we recommend seeking professional guidance from an experienced tax lawyer.
At Victory Tax Lawyers, we have a ready team of experienced tax lawyers who can help you understand your tax obligations and what to do when you receive an IRS notice. Book a free attorney consultation with our experts today and get the guidance and support you need to stay tax-compliant.
