IRS Lock-in letter. Withholding and Form W-4 have changed.

Everyone dreads opening a letter from the IRS. The Lock-in letter is common. It means the IRS has determined an employee is not withholding enough. The letter goes to the employer and the employee. This can happen if an employee is continually late in paying taxes due and the IRS determines the issue is they are not withholding enough. The employee has a certain period of time to submit a new W-4 which must have more withholding, and never less.

But wait, you say, I thought an employee could claim whatever withholding they wanted on a W-4. Well sort of. The old W-4 form allowed that, and millions are still locked in on it. However the new W-4 is more complex. It allows for multiple jobs and 1099 incomes, has worksheets, and specifically does not allow for less withholding that what is calculated. You can withhold more than calculated, but not less. And everything needs to be documented. So, if you’re single, you might have claimed a bunch of dependents on the old W-4 to get more money in your paycheck. Those days are gone. The form asks how many dependents you have, and making up numbers is not recommended.

A Lock-in letter is not a penalty and is not saying taxes are due. It will however result in the taxpayer having more money withheld in their W-2 paychecks, so the checks will be smaller. Obviously, this could be an issue for some people if the higher withholding has a financial impact on them.

I’m preparing taxes at H&R Block now. If you get an IRS letter that is confusing or you aren’t sure what do do, make an appointment with an Enrolled Agent at a Block office. An EA is “a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels—examination, collection, and appeals—of the Internal Revenue Service.”

However, if you get an IRS letter that says you owe money, and you agree that you do, just send a check and you’re done. If you owe less than $10,000, you can usually set up payment plans online at irs.gov for payments up to seven years.