The IRS advises employers to withhold federal income tax based on the allowances claimed on employees’ valid Form W-4s, even if the withholding amount seems incorrect [1]. Employers must inform employees that the IRS may review and adjust withholding if deemed inadequate, and the employee cannot decrease withholding unless approved by the IRS after a review.
Previously, employers had to submit Forms W-4 claiming complete exemption or more than 10 allowances to the IRS. Now, routine submission is not required, but the IRS may request forms in specific cases to ensure proper withholding.
If the IRS finds insufficient withholding, it issues a “lock-in” letter specifying the maximum allowances. Employers must implement this withholding rate unless the IRS allows a change based on a new Form W-4 submitted by the employee within a specified period.
Employees who no longer work for the employer at the time of the lock-in letter require no immediate action. However, if they return within 12 months, withholding must follow the lock-in rate specified.
Once a lock-in rate takes effect, employers cannot reduce withholding unless approved by the IRS. For more information on this topic, contact a ShindelRock tax professional [2] today.