Posted by Fred Lake

IRS provides millions a pass on penalties for 2018 underpayment

IRS provides millions a pass on penalties for 2018 underpayment

The 2018 deadline for filing of individual income tax returns around the corner, taxpayers should take note of the Internal Revenue Service (IRS) recent announcement of expanded relief from penalties for persons having their 2018 federal income tax withholding and estimated tax payments below their tax liability for the year. For most tax years, individuals must make payments of a minimum of 90% of their tax liability in four (4) installments in the year to prevent the obligation of penalties for not making estimated tax payments. 

The relief is due to changes in the Tax Cuts and Jobs Act (TCJA). This waiver encompasses taxpayers whose total withholding and estimated tax payments are equal to or greater than 85 percent of their taxes owed.

Base

Code Sec. 6654 levies a penalty on a person who underpays his or her estimated tax. The penalty is calculated concerning four vital installment payments of the taxpayer’s estimated tax liability. Each essential installment is equal to 25 percent of the “yearly required payment,” which generally equals the lesser of: 

(1) 90 percent of the tax evident on the individual’s return for that year (or, if there is no return filed, 90 percent of his or her tax for such year) or 

(2) if the person filed a valid replacement for the preceding tax year, 100 percent of the tax shown on that return -110 percent if a taxpayer’s adjusted gross income was above $150,000, or $75,000 if married and filing a separate return. 

Income taxes held back from wages are deemed to be paid consistently throughout the tax year unless the taxpayer shows the dates on which the amounts were withheld.

The TCJA was a complete tax overhaul which vividly changed the rules that govern the taxation of individual taxpayers for tax years starting before 2026.  It makes available novel income tax rates and brackets, increasing the standard deduction, suspending personal deductions, improving the child tax credit, reducing the state and local tax deduction, and momentarily reducing the medical expense threshold, among many other changes. The rule also makes a new deduction for non-corporate taxpayers with eligible business income from pass-through.

It is observed that some of the many changes in the TCJA might impact withholding. A Government Accountability Office (GAO) report estimated that nearly 30 million taxpayers could be under-withheld in 2018. Members of Congress and various groups have shown their concern to Treasury and regarding this situation.

Relief

IRS indicated that it is waiving the penalty for any taxpayer who made payment at least 85% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or both combinations.

Notice 2019-11 states that the addition to tax under Code Sec. 6654 for failing to make estimated income tax payments for the 2018 tax year is relinquished for any person whose total withholding and estimated tax payments made on or before Jan. 15, 2019, equal or above 85% of the tax evident on that person’s return for the 2018 tax year.

This relief is made to assist taxpayers who were not able to properly regulate their withholding and estimated tax payments to replicate an array of changes under the TCJA. Although almost all 2018 tax filers are still predictable to get refunds, some taxpayers will surprisingly owe additional tax when they file their returns.

As noted above, the average percentage threshold to evade a penalty is 90%. For waiver cases only, this relief reduces the 90% threshold to 85%. It means that a taxpayer will owe no penalty if they paid a minimum of 85% of their total 2018 tax liability. If the taxpayer paid less than 85%, then they are not qualified for the waiver, and the penalty will be estimated as it usually would be, making use of the 90% threshold.

To request this waiver, a person must file Form 2210, with his or her 2018 income tax return. The form can be filed on paper or with a return filed electronically. Taxpayers should fill up Part I of Form 2210 and the worksheet contained within the form instructions to ascertain if the waiver in this notice applies. If the exemption is applicable, check the waiver box and add the statement “85% Waiver” with the return.

The 85% waiver computation will be incorporated into commercially-available tax software and reflected in the future version of Form 2210 and instructions. Although IRS will not begin processing 2018 returns until Jan. 28, software companies and tax professionals will be accepting and preparing returns before that date.

In conclusion, every taxpayer should take note of the expanded 2018 penalty relief that included in the Notice, and they should carefully follow the instructions in the Notice to ensure they are qualified for the ease and rightly claim the comfort to which they are entitled. 

Fred Lake
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