By Ashlea Ebeling
For taxpayers facing underpayment penalties this tax season, the Internal Revenue Service is upping the relief it’s already provided. That’s welcome news, albeit late.
In Notice 2019-25, the IRS expands penalty relief to those whose withholding and estimated tax payments total at least 80% of the tax shown on the return for the 2018 tax year. The Notice also updates procedures for requesting a penalty waiver, and it explains how to get a penalty refund if you’ve already filed.
It’s not like it was a surprise that underpayment issues would be a big thing this tax season. The reason: All the changes put in by Trump’s tax law (The Tax Cuts and Jobs Act) of December 2017 kicked in. A Government Accountability Office report warned about the problem last summer, and the IRS urged taxpayers to check their withholding.
You have to pay federal income taxes as you earn income—through wage withholding or quarterly estimated tax payments (seniors can withhold from Social Security benefit and/or retirement plan payouts). The rule is pay in at least 90% of the tax you owe or 100% of the tax you owed in the prior year (110% if your adjusted gross income is $150,000 or more). Or else, you owe a penalty. (Note: Penalties aren’t imposed if you owe less than $1,000 in tax.)
With the TCJA changes, it looks like millions of taxpayers could owe penalties. It’s bad enough to find out that you owe taxes when you’re expecting a refund, but it’s even more painful if you owe a penalty on top of that. So, in January, the IRS issued Notice 2019-11. That put the threshold for penalty relief at 85%.
The new Notice, with the 80% threshold, supersedes the January Notice.
“It’s a help,” says Morris Armstrong, an enrolled agent in Cheshire, Connecticut, who had clients benefit from the earlier relief. Now he’s reviewing their returns to see if they apply for the additional relief.
To request a waiver, file Form 2210, along with your tax return. Check the waiver box (Box A) and write in “80% Waive.”
If you’re claiming a refund for a penalty already paid in, file Form 843, Claim for Refund and Request for Abatement. Write in “80% Waiver of estimated tax penalty” on Line 7.
The IRS is continuing to urge taxpayers to do a paycheck checkup by using its Withholding Calculator, especially if any of these common situations apply:
Had a large tax refund or tax bill for 2018 when they filed their tax return this year.
Adjusted their tax withholding in the middle or later part of 2018.
Had a major life change this year.
Are a two-income family.
Have two or more jobs at the same time or only work part of the year.
Claim credits like the Child Tax Credit.
Have dependents age 17 or older.
Itemized deductions in the past.
Have high income or a complex tax return.
Have a large tax refund or tax bill for 2018.
Or call your tax advisor.