What to Do About an IRS Notice 1462 Letter
Understand the purpose of IRS Notice 1462, a mandatory withholding instruction, and the distinct procedures for employers and affected employees.
An IRS lock-in letter is a directive sent to an employer about the amount of federal income tax to withhold from an employee’s wages. This letter is not a tax bill or an audit announcement, but a legal instruction for the employer to adjust the employee’s tax withholding to a rate set by the IRS. The notice is issued when the IRS determines an employee has not had enough tax withheld from their paychecks in the past.
Understanding the Withholding Compliance Program
The IRS Withholding Compliance Program is the mechanism behind the lock-in letter, and its goal is to ensure employees have enough tax withheld to cover their annual tax liability. When an employee consistently under-withholds, it often results in a large tax bill and potential penalties when they file their annual return. The IRS identifies these situations by reviewing Forms W-2 and tax returns for patterns of insufficient withholding.
A review can be triggered by factors like claiming an excessive number of withholding allowances on a Form W-4 or a history of filing returns with a significant balance due. Before issuing a lock-in letter, the IRS may first send a preliminary notice directly to the employee. This notice encourages them to submit a new, more accurate Form W-4 to their employer.
If the employee does not take corrective action, the IRS then proceeds with issuing the lock-in letter to the employer, establishing a new minimum withholding amount. This action is meant to bring the employee into compliance and ensure they meet their tax obligations throughout the year.
Employer Obligations After Receiving a Lock-in Letter
Upon receiving a lock-in letter, an employer has specific legal obligations. The letter will specify the exact withholding instructions, such as filing status and any adjustments, and a date by which these changes must be implemented. This date is no sooner than 60 calendar days from the date on the letter, providing the employee a window to contact the IRS and dispute the determination. The employer must also provide the employee’s copy of the notice to them within 10 business days of receiving it.
The employer is legally bound to implement the withholding rate as specified. A primary rule is that the employer must disregard any new Form W-4 submitted by the employee if it results in less tax being withheld than the rate mandated by the IRS. If an employer has an electronic system for W-4 changes, access to decrease withholding must be blocked for that employee.
An employer can, however, accept a new Form W-4 from the employee if it results in more tax being withheld. For instance, if the lock-in letter specifies a “Single” status, but the employee submits a new W-4 requesting an additional dollar amount be withheld, the employer must honor it. Failure to comply with the lock-in letter can result in the business being held liable for the amount of tax that should have been withheld.
Information Needed to Request a Modification
An employee who believes the mandated withholding rate is incorrect has the right to request a modification from the IRS. To do this, a package of information must be submitted to the agency’s Withholding Compliance unit. The first component is a new, accurately completed Form W-4, which should reflect the employee’s current circumstances to calculate the correct withholding.
Accompanying the new Form W-4 must be a detailed written statement from the employee. This statement needs to explain why the withholding rate determined by the IRS is inappropriate, usually due to a significant change in circumstances affecting tax liability. Examples include a recent marriage or divorce, the birth or adoption of a child, a spouse losing a job, or the purchase of a home that qualifies for tax deductions.
To substantiate the claims, the employee must include supporting documentation. If the request is based on the birth of a child, a copy of the child’s birth certificate is necessary. If a change in income is the reason, recent pay stubs for the employee and their spouse can demonstrate the current financial picture.
How to Submit Your Modification Request
Once the new Form W-4, written statement, and all supporting documents are gathered, the package must be submitted directly to the IRS Withholding Compliance unit, not the employer. The request must be mailed or faxed to the specific address or number provided in the notice received by the employee.
After submission, the IRS will review the employee’s request and documentation. The agency will analyze the information to determine if the proposed withholding on the new Form W-4 is sufficient to meet the projected annual tax liability. This review process can take several weeks. During this time, the employer must continue to withhold at the rate specified in the original lock-in letter until notified otherwise.
If the IRS approves the modification, it will issue a new letter to both the employee and the employer with updated instructions. These new instructions are effective immediately upon receipt by the employer. If the request is denied, the original lock-in rate will remain in effect, and the IRS will provide a reason for the denial.