Lock-In Letters: Can Employees Override the IRS’s Decisions About Withholding?

Recently, I received an inquiry from a client’s employee, who wanted to submit a new W-4 to her employer. Her employer would not accept it because the employer had a lock-in-letter from the IRS on file specifying how much to withhold (based on setting the withholding status) from the employee’s payroll. That lock-in-letter mandates what the employer must withhold from the employee regardless of the employee’s wishes. See Lock-in-Letters.

I told the employee she should have received a letter from the IRS telling her how to refute the amount that the government was requiring her employer to withhold because the employer is required to maintain that withholding status until the IRS changes or releases the lock-in letter – if ever.

Here’s what the IRS has to say in regard to lock-in letters and employees’ rights:

Q: As a company employee, can the IRS tell my employer what to withhold from my payroll if the IRS thinks I am not withholding enough, regardless of my W4.

A. The IRS will tell your employer to withhold tax at a higher rate to insure enough withholding by sending a lock-in letter to your employer. Your employer must ignore any W4 you file that would lower that withholding. You should get a copy of the letter from the IRS. You will have a grace period before it goes into effect. You can send a new W4 and a statement to the IRS supporting your position on the withholding status you want to claim. You should send everything to the address on the letter you received from the IRS. Once the lock-in-letter goes into effect you can’t change your withholding status without the IRS saying you can.

Employees researching lock-in letters online will probably find sites insisting that the IRS can’t send lock-in-letters, that the IRS does not have the right. These sites will also say you can sue your employer and other silly things. But in truth, the IRS does have the right to set an increased withholding rate – and employees also have the right to prove the case for a lower rate.

If you have a legitimate argument that taxes are being over-withheld, even after the grace period, send the information to the IRS, and ask for a change. Also taxes that are over withheld will show up in a refund when you file that year’s Form 1040 Personal Income Tax Return. And there’s nothing like a fat refund to prove to the IRS that a locked-in-letter withholding amount needs to be changed.

Read more about lock-in letters, the employer’s responsibilities, and potential problems and penalties at http://payrollonabudget.com/.

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Charles Read About Charles Read

Charles Read is a former U.S. Marine and combat veteran. He helped convert the joint military unified pay system in 1968 before becoming a Certified Public Accountant and launching a financial industry career spanning 35 years and involving the processing of more than $1 billion in payroll for small businesses across the country. He is the author of the book, “Starting a New Business: A Simple Guide to Financial, Tax and Accounting Consideration.” Charles is a member of the Texas Society of Certified Public Accountants and the American Institute of Certified Public Accountants (AICPA). He is a founding member of the Independent Payroll Processors Association (IPPA).