IRS Lock-In Letter: How Do I Get It Removed? Step-by-Step Guide for Taxpayers
Personal TaxesAll employers must withhold federal taxes from the wages they pay to their employees according to the information provided on Form W4. Failing to update information on this form results in insufficient tax withholding and underpayment of tax obligations.
That’s where the IRS lock-in letter comes in. The notice informs the employer and the employee of the withholding rate adjustment. Sometimes the letter requests a change of employee’s filing status or a reduction of dependents claimed on Form W4.
Once issued, the lock-in letter isn’t easy to remove. We’ll show you what you can do to get the IRS lock-in letter removed and guide you through each step of the way.
Table of Contents
A Quick Overview of Withholding Compliance
Forms W2 and W4 are vital to understanding the federal tax withholding process. You must submit Form W4 to your employer shortly after starting a new job.
The information you provide on this form includes your filing status, number of dependents, annual income, and other sources of income, if any. Your employer will use this information to withhold FICA, federal income, FUTA, Medicare, and Social Security taxes.
However, you must update information on Form W4 after getting married, having a child, or going through a similar life-altering event to comply with the tax withholding regulations.
Employers are also responsible for sending Form W2 to government agencies. The IRS uses this document to determine if taxpayers paid sufficient taxes and check if they claimed too many exemptions.
Some employees, like students or part-time workers, can be exempt from withholding for a year if they have no tax liability the year before and don’t expect to have tax liability in the current tax year.
Reasons the IRS Sends Lock-In Letters
The IRS doesn’t disclose all lock-in letter triggers.
The letter instructs an employer to apply a new withholding rate on an employee’s wages and disregard the information the employee included on Form W4.
Claiming the tax withholding exemption usually prompts the IRS to adjust a taxpayer’s withholding rate. The exemption is only available for a single tax year, so if you don’t update W4 information the following year, the IRS might send you a lock-in letter.
Other lock-in letters triggers are:
- Claiming too many withholding allowances
- Failing to report other sources of income
- Claiming an ineligible dependent
- Continuing to use the same Form W4 after a life-altering event
- Omitting the spouse’s employment status on the Two Earners Multiple Jobs Worksheet
The IRS might issue a lock-in letter for any of these reasons. Ensuring all information you include on Form W4 is accurate and up-to-date is the easiest way to avoid having your tax withholding rate adjusted by the IRS.
Types of IRS Lock-In Letters
The documents you and your employer will receive after the IRS sets the new tax withholding rate aren’t identical, although they contain similar information.
1. 2802C Letter
Taxpayers can adjust their withholding rate before the IRS sends them a lock-in letter. You’ll get a 2802C Self-Correcting letter that tells you your withholdings are too low and instructs you how to adjust them.
Essentially, you must give a new Form W4 to your employer within thirty days after you receive the 2802C notice or appeal the IRS’ decision to request the adjustment of your tax withholding rate.
You can use the Tax Withholding Calculator on the IRS website to determine the appropriate withholding amount. If you don’t respond to the 2802C letter, the IRS will follow up with lock-in letters.
2. Letter 2800C
The IRS sends this notice to employers to inform them that an employee’s tax withholding is insufficient and to prompt them to increase the withholding rate. The employer has sixty days to implement the changes and block the employer’s access to the electronic version of Form W4.
The letter contains the amount an employer should withhold going forward. It sometimes can include a request to change the employee’s filing status to Single with no dependents.
The lock-in letter will arrive with a copy the employer must give the employee before introducing the requested tax withholding changes. Employers aren’t required to respond to Letter 2800C if the letter concerns a former employee.
3. Letter 2801C
This version of the lock-in letter arrives at the employee’s address. Letter 2801C informs the employee that the IRS determined they’re ineligible for tax withholding exemption or different allowances.
It also provides instructions on how to appeal this decision and the documents and information a taxpayer must present to the IRS. The deadline to appeal the lock-in rate is thirty days after the date specified in the letter.
The employer has thirty days after this deadline to implement the lock-in rate or ask the employee to submit a new Form W4.
The information regarding the employee’s filing status, number of dependents, and the withholding amount must be in accordance with the instructions provided in the lock-in letter. However, the withholding amount can exceed the amount from the lock-in letter if an employee decides to include additional withholdings.
4. 2808C and 2813C Letters
An employer receives a 2808C letter if the IRS approves the employee’s appeal. The letter indicates the employee’s filing status and the modified withholding amount.
However, this letter also means that the lock-in is in effect and that the employer can’t change the withholding rate without the IRS’ approval. The changes specified in Letter 2808C are effective immediately and not after two months.
Employees who appeal the lock-in may receive Letter 4243C if the IRS needs additional information to approve or deny their appeal.
Although the lock-in doesn’t have an expiration date, taxpayers can contact the IRS to request the removal of the lock-in after filing and paying taxes at the lock-in rate for three years.
The employer will receive a 2813C letter if the IRS approves the request and agrees to lift the lock-in.
Step-by-Step Guide to Removing IRS Lock-In Letters
As Cooper vs. the United States, No 2021-1627 case proved, filing a lawsuit isn’t the best way to reverse a lock-in decision. Still, taxpayers can get the IRS to reduce the withholding rate if they can present strong arguments that unequivocally show the appropriate rate.
Here’s what you need to do to reverse the lock-in after receiving the 2801C Letter.
- Prepare W4 and Two Earners Multiple Jobs Worksheet if you have more than two jobs or if you and your spouse have jobs.
- Get the most recent pay stubs for each job.
- Determine how many allowances you and your spouse can claim on Form W4.
- Gather copies of the current due return with all attachments, forms, and schedules.
- Date of birth and Social Security number of each dependent you’re eligible to claim.
You’ll have a month to gather these documents and present your case to the IRS Withholding Compliance Unit by calling 855-839-2235. The IRS will reverse its lock-in decision if they agree with your arguments and adjust the withholding rate.
If the IRS declines your appeal, you’ll have to wait for at least three years to remove the lock-in. During that time, your employer cannot agree to change the withholding rate or allow you to access Form W4 electronically.
You can request a release from the lock-in after you fulfill your obligations within the Withholding Compliance Program for three consecutive years.
Frequently Asked Questions
Some employers may terminate an employee after receiving a lock-in letter from the IRS instead of adjusting their tax withholding rate.
The IRS will approve modifications to the lock-in withholding rate after you start a new job if your income increases or you become eligible for certain deductions.
Employers face penalties equal to the amount that should be withheld from an employee’s wage if they continue to withhold taxes at the same rate for more than two months after receiving a lock-in letter.
The IRS will lift the lock-in if it approves an offer-in-compromise or a taxpayer files for bankruptcy.
The Most Efficient Ways to Deal with IRS Lock-In Letters
Including accurate information and all income sources on Form W4 is the safest way to ensure your employer withholds sufficient federal taxes from your wages.
You’re responsible for keeping the information on this form up to date. Hence, you must submit a new form to your employer when the information on the old form becomes obsolete to avoid underpaying federal income tax.
The IRS will allow you to self-correct your tax withholding before sending you a lock-in letter, so you can quickly correct the mistake if you accidentally miscalculated the withholding amount.
If you miss this opportunity, you and your employer will get lock-in letters from the IRS, and adjusting the withholding amount will become much more difficult for at least the next three years.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
