IRS Expands Penalty Waiver for Underpaying 2018 Income Tax

The IRS announced that it is providing expanded penalty relief to certain individuals whose 2018 federal income tax withholding and estimated payments fell short of their total tax liability for the year. (Notice 2019-25)

The IRS is now lowering to 80% the threshold required to qualify for this relief. Under the relief originally announced January 16, 2019, the threshold was 85%. The usual percentage threshold is 90% to avoid a penalty.

This means that the IRS is now waiving the estimated tax penalty for taxpayers who paid at least 80% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments — or a combination.

Why Did Some People Not Have Enough Withheld?

The U.S. tax system is pay-as-you-go. By law, it requires taxpayers to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by either having tax withheld from paychecks or pension payments, or by making quarterly estimated tax payments.

The expanded relief will help many taxpayers who owe tax when they file, including taxpayers who didn’t adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), which was enacted in December 2017.

“We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

The revised waiver computation will be integrated into commercially-available tax software and reflected in the forthcoming revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

What If You Already Filed?

Taxpayers who have already filed for tax year 2018 but qualify for this expanded relief may 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 questions about withholding or the recently announced penalty relief, contact your tax advisor.