A “lock-in letter” is a special order whereby the IRS or another revenue agency orders an employer to withhold taxes from an employee’s wages at a required minimum rate. Although lock-in letters can be appealed, once they take effect, they can be very difficult to reverse.
Any individual hired by a U.S. company to work in the United States as an employee is given the option to withhold taxes at a certain rate from their wages. When the employer withholds those wages and submits them to the IRS, the employee has made a payment of taxes that will be due on that year’s tax returns.
The form upon which tax withholdings are set is called a W-4, and it is typically filled out by every employee who works for wages.
There are two determinations an employee must make when deciding how much wages to withhold to taxes. The first is whether the employee will file taxes as “single” or “married.” Single withholds taxes from the wages at a higher rate than married. The other determination is the number of exemptions. The lower the number, the higher the withholdings. To say a taxpayer is withholding at Single 0 is to say the employee is withholding at the maximum rate which taxes are withheld from wages.
When a wage earner accumulates multiple years of tax debt as a result of under-withholding taxes, the IRS or other taxing agency may issue a “lock-in letter” to the employer instructing them to withhold taxes at a minimum rate on future paychecks. This rate is usually set by the IRS at Single 0, resulting in the employee withholding sufficient taxes (in most cases) to satisfy their tax liability.
However, some taxpayers prefer not to be locked in at Single 0. When that is the case, appeals of a lock-in letter are possible. In many cases, a lock-in letter can be successfully appealed to allow withholdings at the appropriate rate to reflect the employee’s tax return.
For example, presume an employer receives a lock-in letter for a certain employee. This particular employee is married and files a joint tax return with a spouse who does not work. They claim two dependent children on the tax return as well. Although the IRS will try to lock in the employee at Single 0, the employee will typically be allowed to withhold at a lower rate of Married 4.
Appeals of lock-in letters are time-sensitive, so if you receive a lock-in letter, call a tax professional as quickly as possible to help appeal and to ensure your tax withholdings will be appropriate going forward.
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