Posted by Michelson Law Office

IRS Gives more estimated tax penalty relief for 2018

IRS Gives more estimated tax penalty relief for 2018

The IRS has announced that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments were below their total tax liability for the year. The waiver is for any taxpayer who paid a minimum 85% of their total tax liability during the year using federal income tax withholding, the quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90% to avoid a penalty.

The move addresses issues expressed by different parties.  A July 2018 report OF Government Accountability Office (GAO) showed that almost 30 million taxpayers would owe money by the time they file their 2018 personal income tax returns due to under-withholding. A wide range of differences from the Tax Cuts and Jobs Act (TCJA) made many taxpayers under-withheld.

A new letter to the IRS from U.S. Senator Ron Wyden indicated that millions of taxpayers would face unanticipated tax bills and penalties. He stated in his writing that it seems evident that millions of taxpayers who are expecting severe tax refunds will rather owe taxes by the time they file.

The American Institute of CPAs and the National Conference of CPA Practitioners, in different letters to the IRS, also asked the tax agency to relinquish imposing penalties linked to some underpayments and under-withholding due to the TCJA, which was enacted in December 2017

The IRS Commissioner Chuck Rettig said, we heard the concerns from taxpayers and others in the tax community, and we made this adjustment to respond to a unique scenario this year. The widened penalty waiver will enable many taxpayers who did not have enough tax withheld. He urges people to continue to recheck their withholding this year to ensure they are having the right amount of tax withheld for 2019.”

It implies that the IRS is now waiving the expected tax penalty for any taxpayer that paid at least 80% of their total tax liability during the year via quarterly estimated tax payments, federal income tax withholding or both combined.

The revised waiver computation of today will be incorporated into commercially-obtainable tax software and replicated in the next revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Trusts, and Estates.

Taxpayers who have filed for the tax year 2018 but qualify for this expanded relief are qualified to claim a refund by filing Form 843, Claim for Refund and Request for Abatement and add the statement “80% Waiver of estimated tax penalty” on Line7.  The expanded relief of today will assist many taxpayers who owe tax when they file, as well as taxpayers who did not correctly regulate their withholding and estimated tax payments to reveal an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017. 

Extensive outreach and education campaign throughout 2018 was conducted by the IRS and partnering groups to encourage taxpayers to do a “Paycheck Checkup” to prevent a situation where some might have had so much or too little tax withheld when their tax return is filed. If a taxpayer did not submit a reviewed W-4 withholding form to their employer or increase their estimated tax payments, they might not have had sufficient tax withheld during the tax year.

Additional information

The U.S. tax system is pay-as-you-go; therefore, taxpayers are obligated, by law, to pay most of their tax duty in the year, rather than at the end of the year. Is can be achieved by either having tax withheld from pension or paychecks payments, or through making estimated tax payments.

A penalty usually applies at tax filing if so little is paid during the year. This penalty is an interest-based amount that is approximately equivalent to the national attention on the amount that is not paid in a timely way. The penalty would typically not apply for 2018 if tax payments during the year met one of the following tests: 

The individual’s tax payments were at minimum 90 % of the tax liability for 2018, or the individual’s tax payments were at least 100 % of the previous year’s tax liability, in this instance from 2017. Nevertheless, the 100 % threshold is increased to 110 % if a taxpayer’s adjusted gross income is above $150,000, or at $75,000 if married and filing a separate return. 

For waiver purposes only, the relief of today reduces the 90% threshold to 80%. It means that a taxpayer will not get a penalty if they paid at least 80% of the total sum of their total 2018 tax liability. If the taxpayer paid less than 80%, then they are not qualified for the waiver, and the penalty will be calculated, as usual, using the 90%threshold.

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