IR 2019-3, 1/16/2019; Notice 2019-11
In an Information Release and Notice, IRS has announced that it 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 relief is prompted by changes in the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017). This waiver covers taxpayers whose total withholding and estimated tax payments are equal to or greater than 85% of their taxes owed.
Background. Code Sec. 6654 imposes a penalty on an individual who underpays his or her estimated tax. The penalty is calculated with reference to four required installment payments of the taxpayer’s estimated tax liability. (Code Sec. 6654(c) and Code Sec. 6654(d)) Each required installment is equal to 25% of the “required annual payment,” which generally equals 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 such 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, or $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 deemed to be paid evenly throughout the tax year, unless the taxpayer establishes the dates on which the amounts were actually withheld.
The TCJA was a comprehensive tax overhaul that dramatically changed the rules governing the taxation of individual taxpayers for tax years beginning before 2026, providing new income tax rates and brackets, increasing the standard deduction, suspending personal deductions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. The legislation also provides a new deduction for non-corporate taxpayers with qualified business income from pass-throughs.
It has been noted that some of the many changes in the TCJA might impact withholding (e.g., the repeal of the personal exemptions and many itemized deductions and the capping the state and local income tax deduction at $10,000). A Government Accountability Office (GAO) report estimated that nearly 30 million taxpayers could be underwithheld in 2018. Members of Congress and various groups have expressed their concern to Treasury and IRS with regard to this situation.
Relief. IRS indicated that it is generally waiving the penalty for any taxpayer who paid at least 85% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two.
Specifically, Notice 2019-11 provides that the addition to tax under Code Sec. 6654 for failure to make estimated income tax payments for the 2018 tax year otherwise required to be made on or before Jan. 15, 2019, is waived for any individual whose total withholding and estimated tax payments made on or before Jan. 15, 2019, equal or exceed 85% of the tax shown on that individual’s return for the 2018 tax year.
This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the TCJA. Although most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns.
As noted above, the usual percentage threshold to avoid a penalty is 90%. For waiver purposes only, this relief lowers the 90% threshold to 85%. This means that a taxpayer will not owe a penalty if they paid at least 85% of their total 2018 tax liability. If the taxpayer paid less than 85%, then they are not eligible for the waiver and the penalty will be calculated as it normally would be, using the 90% threshold.
To request this waiver, an individual must file Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts), with his or her 2018 income tax return. The form can be filed with a return filed electronically or on paper. Taxpayers should complete Part I of Form 2210 and the worksheet included in the form instructions to determine if the waiver in this notice applies. If the waiver applies, check the waiver box (Part II, Box A) and include the statement “85% Waiver” with the return.
The 85% waiver computation will be integrated into commercially-available tax software and reflected in the forthcoming revision of Form 2210 and instructions. Although IRS won’t begin processing 2018 returns until Jan. 28, software companies and tax professionals will be accepting and preparing returns before that date.
References: For estimated tax payments, see FTC 2d/FIN ¶S-5200 et seq.; United States Tax Reporter ¶66,544.