Court Dismisses Challenge to IRS Lock-In Letter Withholding Rules

A federal court in Texas has dismissed a challenge to the IRS regulation governing lock-in letters, leaving withholding directives issued to two employers in place, according to HRMorning.

In November 2024, the IRS sent lock-in letters to the employers of Matthew Lobdell and Shawn Gibson. The letters directed the employers to withhold federal income tax at the maximum Single 0-0 rate, disregarding the employees’ Forms W-4. The IRS had determined that both employees were overclaiming exemptions.

Impact on Employee Paychecks

The letters increased withholding by about $1,100 per paycheck for Lobdell and $950 per paycheck for Gibson. The employees said they objected to the IRS by mail and phone, but the agency did not reconsider their withholding status.

Lobdell and Gibson sued, challenging the regulation that authorizes IRS lock-in letters. On Sept. 16, 2026, a federal court in Texas dismissed the case without prejudice, ruling that the requested relief was barred by the Anti-Injunction Act and the Declaratory Judgment Act’s tax exception. As a result, it did not reach the merits of the plaintiffs’ challenges to the lock-in-letter regulation. The letters issued to Lobdell’s and Gibson’s employers remain in effect unless the agency modifies or withdraws them.

What Employers Need to Know About Lock-In Letters

An IRS lock-in letter is a mandatory withholding instruction, not a W-4 dispute the employer can resolve. Employers that receive one must give the affected employee the IRS-provided employee copy of the lock-in letter within 10 business days if the employee is still employed. They must also apply the specified withholding arrangement on the notice’s effective date.

Employers must honor a Form W-4 that increases withholding but must disregard one that would reduce withholding below the letter’s instructions unless the IRS approves the change.

Implications for Payroll Teams

Payroll departments should treat lock-in letters as non-negotiable directives. Failure to comply can lead to penalties. When a lock-in letter arrives, payroll must update the employee’s withholding status promptly and ensure that any new W-4 submitted by the employee does not reduce withholding below the lock-in rate without IRS approval.

Because rules vary by jurisdiction, employers should consult with tax or legal professionals for specific situations.

Case Background

The case is Lobdell v. United States. The court’s dismissal without prejudice means the plaintiffs could potentially refile if circumstances change, but for now, the IRS regulation stands and the lock-in letters remain in effect.

Sources: HRMorning