Lock in Letter Points of Authority
Edited and updated 07/09/2014
The information on the “lock in letter” is quite lengthy with a lot of information. To make it simple, there is one statute (with regulation), one regulation (without statute) and Supreme and lower Court opinions summarized by the Department of Justice which are at issue here.
The Statute that prohibits the Lock-in” letter is found at 26 USC §3402(n) [Regulation; 26 CFR Sec. 31.3402(n)-1]; Employees incurring no income tax liability:
“(n) Employees incurring no income tax liability Notwithstanding any other provision of this section, an employer shall not be required to deduct and withhold any tax under this chapter upon a payment of wages to an employee if there is in effect with respect to such payment a withholding exemption certificate (in such form and containing such other information as the Secretary may prescribe) furnished to the employer by the employee certifying that the employee –
(1) incurred no liability for income tax imposed under subtitle A for his preceding taxable year, and
(2) anticipates that he will incur no liability for income tax imposed under subtitle A for his current taxable year.”
The following sentence has been added to the end of this section (n) since this post was first published: “The Secretary shall by regulations provide for the coordination of the provisions of this subsection with the provisions of subsection (f).” Subsection (f) contains the regulations for the withholding exemptions. Reading over subsection (f) renders no reference to, nor can be implied, that would allow the ‘secretary’ or his delegate, authority to alter the exemption certificate.
Note added 7/5/2014
Had a good comment from a reader which caused me to research the CFR regulation for 26 USC 3402(n). Noticed that the new regulation (2014) has several interesting additions made, one important addition states, “In general. Notwithstanding any other provision of this subpart (except to the extent a payment of wages is subject to withholding under §31.3402(g)-1(a)(2)”
The lawyers that work hard at trying to confuse the people and I guess it will work on some. Remember that “knowledge is power and those who chose to govern themselves need that power that knowledge gives”.
There are basically two legal facts that are a bar to the implementation of the ‘lock-in’ letter or the ‘notice’. They are the legal importance of the word ‘notwithstanding’ found in the Statute and the fact that the IRS is working under the direction of a ‘regulation’ which is unsupported by a Statute. Irrespective of what the fools at the IRS do in rewriting the regulation on the ‘lock-in’ letter, they are ‘grabbing at straws’ relying upon the lack of knowledge the people have on this issue.
The many times the regulation has been altered is evidence of the confusion in the legal division of the Treasury to cover their back–ends. As of the publication of the United States Code there have been no changes in what Congress intended in the law. It is still “notwithstanding any other provision of this section”, there are NO “exceptions”. The second, would be what is covered in this report, that regulations ARE NOT law, they implement the law as passed by Congress and Congress has not expressed any desire to rewrite the statute to conform to the wishes of the IRS.
The regulation in question, when first published was found at 26 CFR §31.3402(f)(2)-1(g)(5)(ii) thru (vii). Interesting parts read as follows; (ii) The Internal Revenue Service may find that a copy of a withholding exemption certificate submitted contains a materially incorrect statement or it may determine, after written request to the employee for verification of the statements on the certificate, that it lacks sufficient information to determine if the certificate is correct. If the Internal Revenue Service so finds or determines and notifies the employer in writing that the certificate is defective, the employer shall then consider the certificate to be defective for purposes of computing amounts of withholding. . . .
(vii). . . . The employer shall continue to disregard that new certificate and shall continue to withhold amounts from the employee on the basis of the maximum number specified in the written notice received from the Service unless and until the Internal Revenue Service by written notice (under paragraph (g)(5)(iii) of this section) advises the employer to withhold on the basis of that new certificate and revokes its earlier written notice.
The regulation has been rewritten and softened and now found at 26 CFR §31.3402(f)(2)-1(g)(2), in part it reads: (2) Notice of the maximum number of withholding exemptions permitted—(lock-in letter? ed.) (i) Notice to employer. The IRS may notify the employer in writing that the employee is not entitled to claim a complete exemption from withholding or more than the maximum number of withholding exemptions specified by the IRS in the written notice. The notice will also specify the applicable marital status for purposes of calculating the required amount of withholding. The notice will specify the IRS office to be contacted for further information. The notice of maximum number of withholding exemptions permitted may be issued if—
(The language used by the IRS in rewriting this regulation, is unclear as to what the employer should do. So the employer gets a ‘notice’, the regulation does not say that the employer should disregard the employee’s certificate. Note the language of the original regulation: “(vii). . . . The employer shall continue to disregard that new certificate and shall continue to withhold amounts from the employee on the basis of the maximum number specified in the written notice received from the Service unless and until the Internal Revenue Service by written notice (under paragraph (g)(5)(iii) of this section) advises the employer to withhold on the basis of that new certificate and revokes its earlier written notice.” ed.) continuing . . .
(A) The IRS determines that a copy of a withholding exemption certificate submitted under paragraph (g)(1) of this section or otherwise provided to the IRS contains a materially incorrect statement or determines, after a request to the employee for verification of the statements on the certificate, that the IRS lacks sufficient information to determine if the certificate is correct.
(B) The IRS otherwise determines that the employee is not entitled to claim a complete exemption from withholding and is not entitled to claim more than a specified number of withholding exemptions.
(ii) Notice to employee. If the IRS provides a notice to the employer under this paragraph (g)(2), the IRS will also provide the employer with a similar notice for the employee (employee notice) that identifies the maximum number of withholding exemptions permitted and specifies the marital status to be used for calculating the required amount of withholding. The employee notice will also indicate the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding exemptions and/or modifying the specified marital status. The IRS will also mail a similar notice to the employee’s last known address. For further guidance regarding the definition of last known address, see §301.6212-2 of this chapter. If the IRS is unable to determine a last known address for the employee, the IRS will use other available information as appropriate to mail the notice to the employee.”
There is NO statute to support the language of the treasury regulation or the activities of the IRS. “Until Congress delegates specific powers to an agency with a reasonable degree of clarity, there is no basis in law for an agency to claim such power.” CARDOZO LAW REVIEW [Vol. 20:989 1999]
“Administrative agency may not, under guise of its rule making power, abridge or enlarge its authority or act beyond powers given it by statute which is source of its power; administrative regulations that alter or amend statute or enlarge or impair its scope are void.” San Bernardino Valley Audubon Soc. V. City of Moreno Valley, 51 Cal.Rptr.2d. 897 (1996, Cal.App. 4th Dist)
Administrative Procedures Act, Title 5 §558(a),(b)
(a) This section applies, according to the provisions thereof, to the exercise of a power or authority.
(b) A sanction may not be imposed or a substantive rule or order issued except within jurisdiction delegated to the agency and as authorized by law.
“…power to issue regulations is not power to change the law…” US v. New England Coal and Coke Company 318 F.2d 138 (1963)
Supreme and lower Court opinions on the importance of the language of the Statute 26 USC Section 3402(n), in particular where the statute states, “notwithstanding any other provision of this section . . . .” (The regulation for 26 USC 3402 has the same language as the regulation 26 CFR Section 31.3402. . .). These cases are summarized by the Department of Justice’s legal division, the Office of Legal counsel in Volume 34 by Daniel L. Koffsky, Applicability of Tax Levies Under 26 U.S.C. §6334 to TSP Accounts Memorandum Opinion For the Chief Counsel Internal Revenue Service (May 3, 2010) (In part): “Although the TSP provisions may appear absolute if read in isolation, section 6334(c)’s ‘notwithstanding’ clause indicates by its terms that all ‘”other law[s] of the United States, . . ., are ineffective to bar a federal tax levy, except as provided by the express exceptions in section 6334(a). As a general rule “the use of such a ‘notwithstanding’ clause clearly signals the drafter’s intention that the provisions of the ‘notwithstanding’ section override conflicting provisions of any other section.” Cisneros v. Alpine Ridge Group, 508 U.S. 10, 18 (1993); see also, e.g., IIRIRA Opinion at 7 (observing that a prefatory “notwithstanding” clause ‘does reflect a congressional intention to displace inconsistent law”) [See also, Shomberg v. United States, 348 U.S. 540, 547-548 (1955), ” In using the “notwithstanding” language in these sections, Congress clearly manifested its intent that certain policies should override the otherwise broad and pervasive principle of the savings clause.”]. Indeed, some courts have observed that ‘”a clearer statement”‘ of congressional intent to supersede all other laws ‘”is difficult to imagine,'” see Cisneros, 508 U.S. at 18 (quoting Liberty Maritime Corp. v. United States, 928 F. 3d 413, 416 (1991) . . . and the Supreme Court has described the “notwithstanding” clause in section 6334 as “direct[ing]” that “[t]he enumeration [of exceptions] contained in §6334(a) . . . is exclusive.” Drye v. United States, 528 U.S. 49, 56 (1991); see also In re Beam (Beam vs. IRS), 192 F. 3d 941, 944 (9th Cir. 1999) (describing section 6334 as “unambiguous” in indicating “that Congress clearly intended to exclude from IRS levy only those 13 categories of property specifically-exempted in section 6334(a))”
Added to this the United States District Court of Pennsylvania (U.S. v. Malinowski, 347 F. Supp. 347) District Court Judge Huyett in addressing the W-4 withholding stated in part; “The effectiveness of this system as a tax collection device obviously depends upon the honesty of the withholding exemptions claims submitted by the employee. The employer is not authorized to alter the form or to dishonor the employee’s claim. The certificate goes into effect automatically in accordance with certain standards enumerated in §3402(f)(3).”
Taking the language used by the DOJ; “the use of such a ‘notwithstanding’ clause clearly signals [Congress’s] intention that the provisions of the ‘notwithstanding’ section in [26 USC §3402(n)], override conflicting provisions of any other section.” It is well settled law given the information cited above, section 3402(n) of the Code, “overrides” 26 CFR 31.302(f)(2)-1(g)(2) and is a violation of the command of the Statute, and its regulation, 26 USC 3402(n). The Supreme Court has cautioned us about using the “notwithstanding” clause as an excuse to repeal other laws. Speaking to the use of “whereas” clauses; “As we have emphasized, ‘repeals by implication are not favored and will not be resumed unless the intention of the legislature to repeal is clear and manifest.’” Hawaii v. Office of Hawaiian Affairs, 129 S. Ct.1436, 1445 (2009)” Fortunately, the use of the “notwithstanding” clause in section 3402(n), does not repeal and law passed by Congress. However, it does, repeal or stands as a bar against the IRS using 26 CFR 31.302(f)(2)-1(g)(2), which is NOT a law, to issue the illegal “lock-in” letter.
Given the numerous hits on this blog, the IRS is still issuing the “lock-out” letters and the government does nothing. It might be interesting to ask the question to the Department of Justice. Their address:
Office of Legal Counsel
Department of Justice
Room 5515, 950 Pennsylvania Ave. N.W.
Washington, D.C. 20530-0001
If you are unable to obtain a copy of the letter from the DOJ, I can make a copy available to you in PDF. Let me know.