Why this matters

An IRS inquiry about withholding signals a timing or reporting mismatch that can lead to taxes owed, penalties, or collection action if ignored. Acting promptly reduces interest, limits penalties under IRS safe‑harbor rules, and preserves options like adjusting withholding or making estimated payments. In my practice working with taxpayers for 15+ years, timely, documented fixes almost always prevent escalation.

Step‑by‑step fixes

  1. Read the IRS notice immediately and follow the instructions
  • Notices usually explain what data the IRS reviewed and what it wants you to do (verify W‑2/W‑2c, pay a balance, or respond with documentation). See IRS guidance on responding to notices for deadlines and sample responses (IRS — Responding to IRS Notices and Letters).
  1. Check your W‑4 and payroll records
  • Verify the W‑4 on file with your employer matches your current filing status and dependents. If it’s wrong, submit an updated Form W‑4. (IRS — About Form W‑4).
  • Contact payroll to confirm amounts actually withheld and to request corrected wage statements (W‑2c) if your employer made a payroll error.
  1. Recalculate your tax and safe‑harbor exposure
  • Use your pay stubs and prior year return to estimate whether you’ve underpaid. To avoid an underpayment penalty you generally must pay either 90% of the current year’s tax or 100% of last year’s tax (110% if your AGI exceeded $150,000). See IRS Publication 505 for details on withholding and estimated tax safe harbors.
  1. Fix withholding or make estimated tax payments
  • If underwithholding caused the notice, increase withholding via a new W‑4 or request additional flat dollar withholding from payroll. For self‑employed or contractors, make timely quarterly estimated payments.
  • For practical guidance on adjusting W‑4 and withholding mid‑year, see our guide on how to update your W‑4 and on correcting overwithholding.
  1. Respond to the IRS with documentation
  • If the notice asks for proof, provide clear copies of W‑2s, pay stubs, your updated W‑4, or corrected wage statements. Keep copies of everything sent and use certified mail or the IRS secure portal where available. If you disagree, explain why and attach supporting records.
  1. Pay what you owe or set up an agreement
  • If the IRS assessment is correct and you can pay, do so to stop additional interest. If you can’t, apply for an Installment Agreement or offer in compromise (if eligible). Instructions are on the notice and at IRS.gov.
  1. Escalate if necessary
  • If you can’t resolve errors with your employer or the IRS, contact the Taxpayer Advocate Service for free, independent help. Use a qualified tax professional for representation if the case is complex.

Documentation and recordkeeping tips

  • Keep copies of W‑4 forms, pay stubs, W‑2/W‑2c, and any payroll correspondence. Document dates and names when you contact payroll or IRS representatives.
  • Retain IRS notices and your written responses. These records shorten resolution time and protect you in case of future questions.

Common causes and quick fixes

  • Employer payroll error: Ask payroll for corrected W‑2 (W‑2c) and provide that to the IRS.
  • Unupdated W‑4 after life changes: Submit a revised W‑4 to increase or decrease withholding.
  • Multiple jobs or side income: Use the multiple‑jobs worksheet on Form W‑4 or make estimated payments.

When penalties may apply

Penalties and interest can apply if you underpay. The IRS generally waives penalties when you meet safe‑harbor payments or reasonable cause is shown. Refer to IRS Publication 505 and Form 2210 instructions for calculating penalties and exceptions.

Practical example from practice

I once helped a client who received an IRS notice after a mid‑year promotion raised their tax bracket. We updated the W‑4, had payroll issue a corrected W‑2, paid the small balance via an online payment, and filed documentation with the IRS. The case closed without penalties because we corrected withholding and responded within the notice deadline.

Helpful resources

Internal reading

Professional disclaimer

This article is educational and does not substitute for personalized tax advice. For case‑specific guidance, consult a CPA, enrolled agent, or other qualified tax professional.