The IRS "Lock-In" Letter

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It is common for self-employeds to fall behind on their estimated tax payments and find themselves stuck with insurmountable tax debt.  As a tax attorney, I see this all the time.  However, even W-2 employees can owe taxes at the end of the year if they claim too many allowances on their Form W-4.

The IRS is big on “voluntary compliance” — in other words, they initially rely on the taxpayer to figure out how much to have withheld for taxes during the year and how much he/she owes when taxes are filed.  But the IRS can also come back and audit you if they believe there were errors on your tax return.  Similarly, the IRS can force you to claim a lower number of allowances if they believe you are not having enough federal taxes withheld.  They do this by way of the “lock-in letter.”  The IRS lock-in letter instructs the employer to withhold federal income taxes at a specified higher rate and prohibits them from accepting a W-4 that reduces that rate.  Of course you may dispute the lock-in rate and get it changed . . .  with IRS approval.