We received a letter
from the Internal Revenue Service informing us that one of our employees is not
having sufficient taxes withheld. What are my obligations now?
– Barbara in
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If the IRS determines
that an employee doesn’t have enough withholding, it will notify the employer
to increase the amount of withholding tax. The IRS does this by issuing what is
known as a “lock-in” letter, specifying the maximum number of withholding
allowances permitted for the employee. The employer will also receive a copy of
the letter for the employee, identifying the maximum number of withholding
allowances permitted and how the employee can provide additional information to
the IRS for determining the appropriate number of allowances. You must give the
employee copy to the employee. But if the employee no longer works for you, you
must notify the IRS of this in writing.
Unless you’re notified
otherwise by the IRS, you have 45 calendar days from the date of the lock-in
letter to begin withholding, based on the allowances specified in the letter.
Once a lock-in rate goes into effect, you can’t decrease withholding without
IRS approval. This means that you must disregard any Form W-4 that decreases
the amount of withholding.
An employee who wants to
submit a new W-4 for a smaller withholding must submit it directly to the
IRS along with a statement explaining why the smaller amount is justified.
If the lower rate is approved, the IRS will notify you, the employer, to
withhold at a specific rate. On the other hand, if the employee gives you a new
W-4 claiming fewer withholding allowances than the maximum number specified in
the lock-in letter, you must increase withholding based on that new W-4.
What happens if you
don’t comply with a lock-in letter? You’ll be on the hook for the additional taxes
that should have been withheld. For more information, go to
www.irs.gov/individuals/article/0,,id=139412,00.html.