United States

IRS to waive estimated tax penalties for individuals following TCJA

TAX ALERT  | 

The Internal Revenue Service issued Notice 2019-11 on Jan. 16, announcing that the IRS is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

The IRS will generally waive the penalty for taxpayers who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. This is a change from the usual penalty avoidance threshold of 90 percent. However, if a 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.

This relief is intended to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to comply with changes under the Tax Cuts and Jobs Act. The updated federal tax withholding tables, released in early 2018, reflected the lower tax rates and the increased standard deduction brought about by the new law. Because of this, many taxpayers withheld less tax in 2018. However, the withholding tables did not fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers may have paid too little tax throughout the year.

The waiver computation will eventually be integrated into commercially-available tax software and reflected in the forthcoming revision of Form 2210 and instructions. However, the IRS urges anyone who made withholding adjustments in 2018 to check their withholding for 2019. The IRS also stated that, “those most at risk of having too little tax withheld from their pay include taxpayers who itemized in the past but now take the increased standard deduction.”

RSM US LLP tax professionals are keeping abreast of the developments in Washington, D.C., and are prepared to help clients navigate the filing season.

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