IRS Gives Taxpayers Greater Relief from Penalties for Underpayment of Estimated Taxes

The IRS has issued additional relief from penalties on those taxpayers who have underpaid their 2018 income taxes.

The U.S. tax system requires taxpayers to “pay-as-you-go,” through a combination of wage withholdings and quarterly estimates, rather than waiting until the end of the year to pay income taxes. Under the law, failing to pay 90% of one’s current year tax can result in the imposition of penalties on the shortfall.

The significant changes to the tax law under the Tax Cuts and Jobs Act of 2017, coupled with the adjustments made to withholding rates, have resulted in many taxpayers having underpaid their 2018 income taxes. This is not unexpected. The IRS issued many warnings to taxpayers throughout 2018 to verify that their withholdings were adequate.

In January of 2019, IRS issued Notice 2019-55, reducing the amount of taxes which needed to be paid through withholding and estimates so as to avoid penalty, from 90% to 85%. However, many taxpayer groups informed the Service that this reduction would not adequately cover the potential problem looming for individuals.

The Service has just stated that the penalty for failure to pay estimated taxes will not apply to those who have paid at least 80% of their 2018 taxes through withholding and estimates. This change will be reflected in the next revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts.

A taxpayer who has already filed a tax return for 2018 and paid a penalty based on prior law can claim a refund by filing Form 843, Claim for Refund and Request for Abatement, and include the statement “80% Waiver of Estimated Tax Penalty” on Line 7. This form cannot be filed electronically.

If you have any questions related to this tax flash, contact your Marcum tax professional.