IRS recently announced that it is expanding the penalty waiver for 2018, with relief to certain filers whose 2018 federal income tax withholding and estimated payments was less than their total tax liability for 2018. (See Notice 2019-25 for more details.)
It seems the Internal Revenue Service can show a little empathy and cooperation. IRS finally realized the confusion created with the new tax program created under the Tax Cuts and Jobs Act (TCJA), created in December 2017.
Pay As You Go Withholding System
Taxpayers who have withholding through their regular paychecks often don’t pay that much attention to the fine print of the Taxpayers who have withholding through their regular paychecks often don’t pay that much attention to the fine print of the withholding system. By law, the U.S. tax system requires that you “pay-as-you-go” withholding system. By law, the U.S. tax system requires that you pay most of the income tax that you will owe as you earn the money on which the tax is calculated.
If you filled out your W-9 correctly and have the required minimum deducted from your paycheck and submitted by your employer, then you probably should not have to think about it again until it’s time to prepare your tax return.
Ideally, you would have paid exactly the correct amount. More likely, you would owe a little more or be due a small tax refund. Some people choose to have any refund owed applied to the following year’s income tax obligation.
Self-employed individuals, or retired people who receive various type of income such as interest and dividends, or pay for part time work, are required to make quarterly income tax estimates, or sooner if they receive a large lump sum.
Withholding Threshold To Avoid Penalties
The usual percentage threshold to avoid penalties is 90%. In other words, you must pre-pay a minimum of 90% of your income tax liability before the end of the tax year. If you pay less than 90% of your final tax obligation, you will owe a penalty on the amount under paid.
The TCJA was passed with the usual confusion from a new tax plan. The threshold was 85% under the relief originally announced January 16, 2019. Apparently that was not enough time for people to understand and make the necessary adjustments to their payroll withholdings or quarterly estimates. Even tax preparers were caught short and many did not fully advise their clients.
However, the IRS listened. For income tax returns for the year 2018 only, witness the IRS expanding penalty waiver for 2018 underpayment of income tax to 85% for the withholding threshold to avoid penalties.
Why Some Taxpayers Made 2018 Underpayment Of Income Tax
Short quarterly estimates and not changing the withholding levels to match the new TCJA program is primarily where the penalty waiver for 2018 underpayment of income tax became an issue. Taxpayers, employers and some accountants were unable to adapt and incorporate the changes quickly enough.
“We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”
The revised waiver computation will be integrated into commercially-available tax software and reflected in the forthcoming revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
What If You Already Filed Your 2018 Tax Return?
What to do if you already filed your 2018 tax return but qualify for this expanded relief?
You may claim a refund by filing Form 843, Claim for Refund and Request for Abatement. Include the statement “80% Waiver of estimated tax penalty” on Line 7. This form must be mailed on paper. It cannot be filed electronically.
Hopefully you prepaid at least 85% and already filed your 2018 tax return. If you got swept up in the new rules, at least you might get some relief for once, with IRS expanding the penalty waiver for 2018 underpayment of income tax.