IR 2019-144, 8/14/2019
In an Information Release, IRS has announced that the relief that it announced earlier this year, with respect to the individual taxpayer estimated tax penalty for 2018, will be automatically applied to taxpayers who filed their 2018 returns but did not claim the relief.
Background—the individual taxpayer estimated tax penalty, generally. Code Sec. 6654 imposes a penalty on individuals who underpay estimated tax. To avoid the penalty, each of four required installments must equal 25% of the “required annual payment,” which generally is the lesser of: (1) 90% of the tax shown on the individual’s return for that year (or, if no return is filed, 90% of his or her tax for that year), or (2) if the individual filed a valid return for the immediately preceding tax year, 100% of the tax shown on that return (Code Sec. 6654(d)(1)(B)) — 110% if a taxpayer’s adjusted gross income was more than $150,000 ($75,000 if married and filing a separate return). (Code Sec. 6654(d)(1)(C)) Under Code Sec. 6654(g), income taxes withheld from wages are treated as paid evenly throughout the tax year, unless the taxpayer establishes the dates on which the amounts were actually withheld.
Background—changes made by the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 2017) was a comprehensive tax overhaul that dramatically changed the rules governing the taxation of individuals for tax years beginning before 2026, providing new income tax rates and brackets, increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. TCJA also provided a new deduction for non-corporate taxpayers with qualified business income from pass-throughs. Many of the TCJA’s changes impacted withholding.
A Government Accountability Office (GAO) report estimated that nearly 30 million taxpayers could be underwithheld in 2018.
Background—previous IRS pronouncements about relief. In response to expressions of concern by members of Congress and other groups about withholding difficulties, IRS provided in Notice 2019-11, 1/16/2019, that the estimated tax penalty under Code Sec. 6654 for the 2018 tax year was waived for individuals whose total withholding and estimated tax payments made by Jan. 15, 2019, equaled or exceed 85% of the tax shown on their 2018 returns.
Notice 2019-11 instructed taxpayers who hadn’t yet filed their 2018 return to request the tax relief via Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts. Taxpayers who had already filed their 2018 return were instructed to file for a refund on Form 843, Claim for Refund and Request for Abatement.
Then, in March 2019, IRS expanded the estimated tax penalty waiver that it previously announced in Notice 2019-11 so that it applied to taxpayers whose total 2018 withholding and estimated tax payments made by Jan. 15, 2019 was 80% or more of their 2018 taxes, down from 85%. (Notice 2019-25, 2019-15 IRB; see IRS expands penalty relief for underpayment of 2018 estimated individual taxes.
IRS makes the relief automatic. IRS has now announced that the relief contained in the earlier Notices will automatically apply to those taxpayers who already filed their 2018 federal income tax returns but did not claim the relief.
Over the next few months, IRS will mail copies of notices CP 21 (which cover changes to tax returns) granting this relief to affected taxpayers. Any eligible taxpayer who already paid the penalty will also receive a refund check about three weeks after the CP21 notice is mailed regardless if they requested penalty relief. IRS emphasized that eligible taxpayers who have already filed a 2018 return do not need to request penalty relief, contact IRS, or take any other action to receive this relief.
IRS urges persons who have not yet filed for 2018 to claim the waiver on their return. This group includes those with tax-filing extensions due to run out on Oct. 15, 2019. Taxpayers who file electronically should use the waiver computation built into their tax software. Those who choose to file on paper should fill out Form 2210 and attach it to their 2018 return.
Observation. The Information Release doesn’t contain a date for purposes of defining “already filed.” Thus, it isn’t clear what date a 2018 return has to be filed by in order to qualify for automatic relief.
Observation.The penalty waiver doesn’t require that any estimated payments be made by the first three installment due dates for 2018. Thus, for example, a taxpayer who made no 2018 estimated payments during 2018 and had no withholding during 2018 avoids the estimated tax penalty if he paid 80% of his liability on Jan. 15, 2019.