The Internal Revenue Service said Wednesday it wouldn’t penalize many taxpayers whose tax withholding and estimated tax payments fell short last year because of changes in the withholding tables under the Tax Cuts and Jobs Act.
The IRS said it would generally waive the tax penalty for any taxpayer who paid at least 85 percent of their total tax liability last year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold for avoiding a penalty is 90 percent. The waiver calculation will be built into commercially available tax prep software and show up in an upcoming revision of Form 2210 and its accompanying instructions.
The relief comes after requests from the American Institute of CPAs, the National Conference of CPA Practitioners, and the top Democrat on the Senate Finance Committee (see AICPA and NCCPAP ask IRS to suspend tax penalties and Wyden asks IRS to overlook penalties for unexpected tax bills). Sen. Ron Wyden, D-Ore., cited estimates from the Government Accountability Office in a report last year that nearly 30 million taxpayers could have underwithheld their taxes after the passage of the new tax law in December 2017.
The relief is designed to help taxpayers who weren’t able to properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act, the far-reaching tax reform law enacted in December 2017.
“We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” said IRS Commissioner Chuck Rettig in a statement. “We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”
The IRS issued Notice 2019-11 on Wednesday, providing a waiver of the addition to tax under section 6654 of the tax code for the underpayment of estimated income tax for certain individuals who would otherwise be required to make tax year 2018 estimated income tax payments on or before Jan. 15, 2019. The waiver, though, is limited to individuals whose total withholding and estimated tax payments equal or exceed 85 percent of the tax shown on the return for the 2018 taxable year.
The updated federal tax withholding tables that were released early last year mostly reflected the Tax Cuts and Jobs Act’s lower tax rates and doubled standard deduction. That generally meant taxpayers had less tax withheld from their pay last year and saw more money show up in their paychecks.
However, the withholding tables didn’t completely take into account other changes, such as the suspension of dependency exemptions and reduced itemized deductions. That meant some taxpayers paid too little in taxes last year if they didn’t properly revise the W-4 withholding form with their employer or increase their estimated tax payments. The IRS and some of its partner groups did extensive outreach and education last year to encourage taxpayers to do a “Paycheck Checkup” to avoid such a situation where they had too much or too little tax withheld when they file their tax returns.
While most 2018 tax filers are still expected to receive tax refunds, the IRS warned that some taxpayers will unexpectedly find out they owe additional taxes when they file their returns this year.
The IRS is urging everyone to check their withholding for 2019, especially anybody who is now facing an unexpected tax bill when they file. To help taxpayers get their withholding amount correct in 2019, an updated version of the IRS’s online Withholding Calculator is now available on IRS.gov.
Typically, a penalty applies at tax filing if too little is paid during the year. Normally, the penalty wouldn’t apply for 2018 if tax payments during the year met one of the following tests:
The person’s tax payments were at least 90 percent of the tax liability for 2018 or
The tax payments were at least 100 percent of the prior year’s tax liability, in this case from 2017. However, the 100 percent threshold increased to 110 percent if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.
For waiver purposes only, Wednesday’s tax relief will lower the 90 percent threshold to 85 percent. That means a taxpayer won’t owe a penalty if they paid at least 85 percent of their total 2018 tax liability. If the taxpayer paid less than 85 percent, then they are not eligible for the waiver and the penalty will be calculated as it normally would be, using the 90 percent threshold.
Senate Finance Committee chairman Charles Grassley, R-Iowa, addressed the problems with the withholding penalty on the Senate floor on Wednesday. “A chief priority for the new withholding tables was accuracy,” he said. “Extensive analysis was done to help taxpayers get the right amount withheld from their paycheck – not too much and not too little. However, no withholding table will ever be perfect. Every taxpayer may be affected a little differently under the new law based on their personal circumstances. The IRS continues to consider whether future improvements to the withholding structure may be necessary, which I support and will be monitoring as chairman of the Finance Committee. The IRS has also embarked on an extensive campaign to alert taxpayers to check and update their withholding. This included establishing an online withholding calculator to help them determine what, if any, adjustments to their withholding may be necessary. That being said, there are still going to be some taxpayers who may discover that they were underwitheld due to changes in the law and owe tax at the end of the year. A subset of these taxpayers could be subject to a penalty tax for underpayment.”
He noted that Senator Wyden, the ranking Democrat on the committee, had raised the issue with IRS Commissioner Rettig earlier this month. “I generally agree with the Ranking Member and have encouraged the IRS to be lenient on penalties, especially with this first time through a filing season under the new tax law,” said Grassley. “If a taxpayer is underwitheld as a result of changes in the law – not through fault of their own – the IRS should consider what actions the agency can take to provide penalty relief. But the issue of underwitholding due to the passage of tax reform should not be exaggerated. Yes, as the Ranking Member claims in his letter to the Commissioner, it is estimated that as many as 30 million taxpayers may have had taxes underwitheld from their paychecks. But, what hasn’t been said is that 30 million is actually only a 3 percentage point increase from how many taxpayers would be underwitheld under the old law. Moreover, just because a taxpayer was underwitheld during the year does not automatically mean they will be subject to a penalty tax. Safe harbors have long been in place to protect taxpayers whose withholding is slightly off from being penalized.”
For further details on the IRS relief, see Notice 2019-11.
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