A client recently picked up his personal tax return.
He asked to see me.
There was tax due with the return. I thought he had
adjusted his withholding to increase his take-home pay, as he had spoken to me
of financial stress. I am not a fan of doing this, as tax is due whether one
withholds or not.
He could not have tax due with his return, he
explained, as he had received a lock-in letter from the IRS.
There is something I do not often see.
There are two versions of the lock-in letter: one sent
to the employee and another to the employer. The IRS is telling both that it
wants additional withholding from each paycheck, commonly meaning single withholding
with no dependents.
The lock-in surprised me, as my client is not one to
game the system. What he did was fall behind on his taxes due to a failed business.
There are liens – IRS and private - that he is working through.
The IRS sends the
employee a letter informing him/her that his/her withholdings are too low. The
IRS wants the employee to self-adjust by increasing their withholding.
If that fails, the IRS sends the employer a letter. An
employer has 60 days from the date of the letter to unilaterally adjust the
employee’s withholdings.
The employee can quit, but the lock is good for 12
months. The employee will have to go somewhere else for a year before returning
if he/she wishes to avoid the lock.
The 60 days has two purposes:
(1) To allow the employer time to make the changes, and
(2) To prompt the employee to contact the IRS. If so – and if the employee can persuade the IRS – the IRS may modify the lock.
If the employee keeps his/her nose clean, he/she can
request the IRS remove the lock-in. Figure that it will take about three years
of tax returns, however, so it is best to avoid the lock altogether.
The employer is extremely unlikely to buck the IRS, as
the employer might then draw surrogate liability. One might be a valued
employee, but one is not that valued.
Let’s look at a case.
Charles G worked for Volvo Trucks North America
(VTNA). He submitted a W-4 to VTNA claiming that he was exempt from income tax
withholding. He also requested VTNA to stop withholding social security taxes.
VTNA was surprisingly tolerant. It spotted Charles a
99-dependent W-4 (affecting income tax withholding), although it could not do
anything about the social security.
Charles went a couple of years or so before the IRS
contacted him. He blew it off, so the IRS sent VTNA a lock-in letter.
Charles went ballistic.
Charles accused the IRS and VTNA of “acting in violation
of the Racketeer Influenced and Corrupt Organizations Act (RICO).”
Wow. I wonder how it went come employee review time.
The Court of course dismissed Charles’ claim against
VTNA. In general, an employer must follow an employee’s request concerning
withholding. If the employee asserts that he/she is exempt from withholding,
then the employer must comply with such request unless certain situations occur.
A lock-in letter is one of those situations.
It sounds rather self-evident, truthfully.
It also sounds like Charles was a bit of a tax
protestor. A word of advice: don’t go there with Charles. Your chances of
success are between zero and none, and the list of dead bodies on that hill
stretches interminably. Several years ago, we represented a business having an
officer the IRS considered a protestor. I did not agree with the IRS on this,
but I admit that he was getting close to the line. The audit was … unpleasant. There was no question
that school was in session, and the IRS was looking to teach a lesson.
Our case this time was Giles v Volvo Trucks of
North America, 551 F. Supp 2nd 359.
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