IRS Waives Penalty for Many Whose Tax Withholding and Estimated Tax Payments Fell Short in 2018
Tax law generally requires most taxpayers to pay tax on income as the income is earned throughout the year. These ‘pay-as-you-go’ tax payments are often made by withholding tax from paychecks or by making quarterly tax payments. Section 6654(a) of the Internal Revenue Code imposes a penalty when these payments are not timely or sufficient. Generally, this penalty would not be applied if the tax payments made during the year met one of the following two tests:
- The individual taxpayer’s tax payments were at least 90% of their 2018 tax liability OR
- The individual taxpayer’s tax payments were at least 100% of their prior year’s tax liability. Note: For taxpayers with adjusted taxable income of more than $150,000 (or $75,000 if married filing separately), the threshold is increased from 100% to 110% of the prior year’s tax liability.
The IRS published Notice 2019-11 on January 16, 2019 and lowered the 90% threshold to 85% for the 2018 tax year. The IRS has added this cushion to help taxpayers who inadvertently underpaid their taxes during the first year the TCJA went into effect. Because the TCJA prescribed lower tax rates, it meant lower withholding rates and thus more money in many people’s paychecks. Federal withholding tables were updated in early 2018 to reflect the lower tax rates and a higher standard deduction under the TCJA. However, the updated withholding tables could not factor in all the changes necessary to ensure an accurate estimation of tax liability, such as suspension of dependency exemptions and reduced itemized deductions. Consequently, some taxpayers will find that they have underpaid their 2018 tax liability. The IRS has therefore decided to help these taxpayers by lowering the penalty waiver threshold from 90% to 85%.
To request this waiver, the taxpayer must file IRS Form 2210, Underpayment of Estimated Tax for Individuals, Estates, and Trusts with the taxpayer’s 2018 income tax return. Taxpayers should complete Part I to determine if the waiver applies and then check the waiver box (Part II, Box A) and include “85% Waiver” with the tax return. Taxpayers that paid less than 85% will be ineligible for the waiver and will incur a penalty using the 90% threshold.
For more information, please contact Stephen Gregory, Director, at Stephen.Gregory@CohnReznick.com or (959) 200-7021.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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