If you’ve received a Lock-in letter from the IRS, it’s not a penalty informing you that taxes are due. However, it does mean that the IRS has determined that you’re not withholding enough taxes as an employer or employee, and you will likely have more money withheld from your future paychecks. Knowing what you can do when you receive a Lock-in letter will help you avoid any unnecessary repercussions from the IRS.

What is a Lock-In Letter From the IRS?

A Lock-in letter is a special order given by the IRS to employers, requesting them to withhold taxes from an employee’s wages at a minimum rate. The IRS believes employees have consistently submitted incorrect W-4 Forms, are required to have more taxes withheld on future paychecks, and work for an employer that is not taking compliance seriously.

In response, the employer has 60 days to begin withholding at the specified rate. Although Lock-in letters can be appealed, they are time-sensitive. If an employee wants to challenge their allowances after receiving the Lock-in letter, he or she must submit a revised W-4 Form directly to the IRS for approval.

If the IRS does determine that an employee should be exempt, they may send a 2802C Letter. This letter will give information on how to self-correct the matter before the IRS takes further action.

If changes aren’t made, the IRS will send a 2801C Letter. This letter states that employees are not entitled to claim exempt status and are required to respond directly to the IRS within 60 days for a modification. After the 60 days, income tax will be withheld from wages at a single rate with zero allowances.

Common Lock-In Letter Questions

The Lock-In letter program was created to help analyze wages, improve the accuracy of tax information, and increase the effectiveness of IRS actions on withheld tax compliance cases. To make it easier for you to deal with the IRS, we’ve outlined a few common questions about the Lock-In letter program.

Can a Lock-In Letter from the IRS Be Reversed?

Yes, Lock-In letter decisions can be reversed if you contact the IRS within 30 days from the date of the letter. Make sure you have the following information available:

The IRS will take into consideration your explanation for paying a different withholding rate. If they agree with the information provided in your case, then they will reverse the terms of the Lock-In letter.

Are Different Software Systems Required for Lock-Ins before and after 2020?

Even though some requirements and conditions are updated on the 2020 W-4 Form, the same set of withholding tables are used for calculations on taxes before and after 2020. These tables can be applied separately to systems for new and old lock-ins, or a single system can be used based on the 2020 W-4 Form.

As an Employer, What Do I Do if I Receive an Employee’s Revised W-4 Form?

If the employee’s revised form results in more withholding taxes than specified in their Lock-In letter, you must honor the revised W-4 Form. However, if fewer withholding taxes are specified, you must withhold based on the Lock-In letter.

As an Employer, What Happens If I Don’t Lock-In My Employee’s Withholding as Directed?

Employers who don’t follow the Lock-In instructions from the IRS will be liable for paying the additional amount of tax that should have been withheld.

As an Employer, How Can I Prevent Employees from Changing Their W-4 Forms Online After They’ve Been Locked-In by the IRS?

Employees who have been locked-in after filing an online W-4 Form can be blocked from using the system and changing their information.

What if an Employee Submits an IRS W-4 Form that has Clearly Been Altered?

Any alteration of a W-4 Form will cause it to be invalid. Employers must inform the employee that their form is invalid, request that another one be completed, and withhold amounts based on their prior W-4 Form.

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About The Author

Ingrid Principe

Ingrid is the Content Marketing Manager at Paypro, managing both inbound and outbound marketing initiatives for the company. She has 15+ years’ of extensive marketing communications experience, leveraging brand awareness and strategic partnerships to increase sales revenue for a diverse group of B2B brands.