When Does an IRS Lock-in Letter Expire?

An IRS lock-in letter is an official communication from the Internal Revenue Service (IRS) to an employer, directing them to adjust an employee’s federal income tax withholding. Its primary purpose is to ensure adequate income tax is withheld from an employee’s wages throughout the year, preventing potential underpayment of taxes. This aims to align an employee’s actual tax liability more closely with the amounts withheld.

Understanding the IRS Lock-in Letter

An IRS lock-in letter instructs an employer on the specific federal income tax withholding rate or the maximum number of withholding allowances an employee can claim. This instruction often overrides the information an employee previously provided on their Form W-4, Employee’s Withholding Certificate. The IRS issues such a letter when it determines an employee is not having enough federal income tax withheld from their wages.

Common triggers for a lock-in letter include claiming excessive allowances on Form W-4, having a tax balance due for one or more years, or claiming exempt status when not entitled. Before a formal lock-in letter (such as Letter 2800C to the employer and 2801C to the employee) is sent, the IRS may first send a self-correcting letter (Letter 2802C) to the employee, offering an opportunity to adjust their withholding voluntarily.

Duration and Expiration

An IRS lock-in letter remains in effect indefinitely once issued. These letters do not have a fixed expiration date, such as the end of a calendar year. An employer must continue to follow the withholding instructions outlined in the letter until the IRS officially notifies them otherwise.

The IRS might issue a notice to release the lock-in or specify a different withholding arrangement under certain conditions. This could happen if a tax issue is successfully resolved, or if the taxpayer actively requests a change and provides sufficient supporting documentation. To be released from the Withholding Compliance Program, a taxpayer generally needs to demonstrate compliance by filing returns and paying due taxes for three consecutive years.

Responding to a Lock-in Letter

Upon receiving a lock-in letter, both the employer and the employee receive a copy. The employee copy explains the situation and provides an opportunity to respond. The employer is legally obligated to implement the specified withholding changes, typically within 60 days from the letter’s issue date.

Employers must disregard any Form W-4 submitted by the employee that would result in less withholding than the lock-in letter specifies. However, if an employee submits a new Form W-4 that results in more withholding than the letter requires, the employer must honor that higher withholding amount. Employees should review their current Form W-4 and understand how the new withholding rate will impact their take-home pay.

Requesting a Change or Revocation

Taxpayers can seek a change to the withholding specified in a lock-in letter or request its revocation. If an employee disagrees with the IRS’s decision, they typically have 30 days from the date of the employee copy of the letter to contact the IRS and appeal. The lock-in letter itself usually provides contact information for the IRS Withholding Compliance Unit.

To support a request for fewer allowances or a different withholding rate, the taxpayer will need to provide documentation to the IRS. This might include a new Form W-4 along with supporting statements or proof of changes in financial circumstances, deductions, or credits. These documents should be sent directly to the IRS office indicated on the lock-in letter.