What is an IRS "lock-in letter"?

An IRS "lock-in letter" refers to a notice issued by the Internal Revenue Service that instructs an employer to restrict an employee’s withholding allowances. This letter is typically sent when the IRS identifies discrepancies in an employee's tax filings, which may indicate that they are claiming too many allowances and thus withholding too little tax from their paychecks.

The letter specifies the maximum number of allowances the employee is permitted to claim, effectively locking in the withholding at that level until the employee can provide documents to correct their withholding allowances or resolve any outstanding issues with the IRS. Given the focus on ensuring proper tax collection, this mechanism helps reduce tax underpayment by aligning withholding with expected tax liability.

In contrast, the other options do not accurately describe the purpose or function of a lock-in letter. A termination notice issued by the IRS is unrelated to withholding allowances; a tax refund notice focuses on the return of excess tax collected rather than withholding instructions, and a request for additional tax documentation does not address the specific enforcement of withholding limits.