What to Do When You Receive an IRS Lock-In Letter

An IRS lock-in letter, formally known as Letter 2800C, is an official directive sent to an employer that mandates a specific amount of federal income tax to be withheld from an employee’s wages. It is issued for employees with a history of under-withholding, often due to claiming too many allowances on a Form W-4. The letter overrides the employee’s current withholding arrangement to prevent a large tax bill at the end of the year.

The notice specifies the exact marital status and number of allowances the employer must use, or sometimes a specific additional dollar amount, to calculate the employee’s withholding. This action effectively “locks in” a withholding rate that the employee cannot change without IRS approval.

Employer Obligations Upon Receipt

Upon receiving a lock-in letter, an employer has specific responsibilities. The employer must begin withholding tax based on the letter’s instructions no later than the first payroll period that ends on or after 60 days from the date of the notice. During this 60-day window, the employer continues to use the employee’s existing Form W-4. Simultaneously, the IRS sends a separate notice, Letter 2801C, directly to the employee.

Once the effective date arrives, the employer must adjust the payroll system to reflect the withholding instructions, such as a “Single” filing status with zero allowances. From this point forward, the employer is legally bound to disregard any new Form W-4 submitted by the employee if it results in less tax being withheld. An employer can only accept a new W-4 that increases the withholding amount or one that the IRS has approved through a subsequent notice.

Failure to comply with the lock-in letter carries significant consequences for the employer. If an employer does not withhold taxes according to the IRS directive, the business can be held liable for the amount of tax that should have been withheld but was not. This liability includes not only the back taxes but also potential penalties for non-compliance.

Employee Actions and Recourse

When an employee receives their notice, Letter 2801C, it is not a final mandate. The letter explains why the IRS is taking this action and provides instructions on how to appeal. The employee has the right to request a modification if they believe their circumstances warrant a different withholding rate, but this appeal must be made directly to the IRS.

The employee has 30 days from the date on the Letter 2801C to contact the IRS Withholding Compliance Unit and dispute the determination. To do this, the employee must complete a new Form W-4 that accurately reflects their current financial situation. They must also provide a written statement explaining why a different withholding rate is justified.

Valid justifications involve a significant change in financial circumstances. Examples include getting married, having a child, purchasing a home with substantial mortgage interest and property tax deductions, or having a spouse who has significantly increased their own withholding. The statement should be clear and concise, directly connecting life events to the expected tax liability for the year.

The employee must submit the new Form W-4 and supporting documents directly to the IRS by following the instructions in their letter. The lock-in rate will go into effect as scheduled unless the IRS approves the employee’s appeal and notifies the employer before the 60-day implementation period ends.

IRS Review and Final Determination

After the employee submits their request for modification, the materials are reviewed by the IRS Withholding Compliance Unit. The agency assesses the new Form W-4 and the employee’s written statement to determine if the requested withholding arrangement is sufficient to meet the anticipated annual tax liability.

There are three potential outcomes from this review:

• The IRS approves the request and sends a new letter to the employer authorizing the employee’s proposed withholding.
• The IRS denies the request, and the original lock-in rate must be used.
• The IRS issues a modification, authorizing a less restrictive rate than the original lock-in but different from the employee’s request.

The final determination is always communicated in writing to the employer, who then implements the instructions.

A lock-in rate is not permanent. It is released by the IRS after an employee demonstrates a consistent history of compliant tax withholding, which may take a few years. Once the IRS is satisfied that the under-withholding issue has been resolved, it will issue a letter releasing the employer from the lock-in requirements.