IRS Waives Penalty for Many Whose Tax Withholding and Estimated Tax Payments Fell Short in 2018
On January 16, 2019, the Internal Revenue Service (IRS) has announced it would waive the estimated tax penalty for those taxpayers that paid at least 85% of their 2018 tax liability through income tax withholding or quarterly estimated IRS payments. The usual threshold to avoid the underpayment penalty is 90% of current year tax. This year, the IRS has granted relief for 2018 tax returns to help those taxpayers unable to properly adjust their withholding or estimated payments to reflect changes made by the Tax Cuts and Jobs Act (TCJA) enacted in late 2017.
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.
What Does CohnReznick Think?
The IRS recognized the challenge to taxpayers in 2018 in accurately estimating their tax liability in light of the changes made by the TCJA. Taxpayers that paid at least 85% of their tax liability may obtain a waiver of the estimated payment penalty by filing Form 2210 with their 2018 tax returns. Taxpayers should also consult their tax advisors regarding their withholding and estimated payments for 2019 to ensure sufficient tax is withheld or paid.
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. 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 members, 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.
Visit Our Tax Reform Resource Center
Insight10 Questions: Increase cash flow with the R&D Tax Credit
InsightDC 2020 Budget Support Legislation Brings Significant Tax ChangesDC Mayor Muriel Bowser signed the Fiscal Year 2020 Budget Support Act of 2019.
On-demandHow Renewables Can Get Into The Zones – The Opportunity ZoneJoel Cohn, Britta Von Oesen, John MarcianoPotentially one of the most beneficial tax incentives in decades, Opportunity Zones might be a boon to the rapidly changing renewable energy industry, particularly given looming ITC and PTC step-downs. However, complex IRS requirements, a tight investment deadline (12/31/19), and a long vesting period (7-10 years) to reap maximum tax benefits make it especially challenging for investors and developers to leverage this opportunity.
InsightCalifornia AB91 Closes Loophole, Provides Tax Breaks for Small Businesses, FamiliesHee Jo Chun, John OnOn July 2, 2019, California Gov. Gavin Newsom signed Assembly Bill 91 (AB91), which conforms to several provisions in the Tax Cuts and Jobs Act (TCJA) passed by Congress in 2017. This bill improves the state’s long-term financial stability by closing a series of loopholes and providing tax breaks to small businesses.
InsightCapitol Connection: The budget deal paves the way to tax legislationBob MossWHAT HAPPENED? Last week, the White House and Congress reached a budget deal that doesn't appear to include any tax measures, raising questions for us about what the next vehicle might be for matters like extenders and technical corrections to the Tax Cuts and Jobs Act of 2017. That outcome leaves a range of advocates, including supporters of both the Affordable Housing Credit Improvement Act (AHCIA) and the New Markets Tax Credit (NMTC), looking for ways to get their priorities into law.
InsightNY, NJ, and CT Sue IRS for Disallowing SALT Deduction Cap WorkaroundCorey Rosenthal, Lance RothenbergNew York, New Jersey, and Connecticut filed a joint lawsuit against the IRS on July 17, 2019, setting up the next chapter and newest battlefront in the dispute between certain states and the federal government in response to the Tax Cuts and Jobs Act’s $10,000 cap on the state and local tax (SALT) deduction.