IRS Gives Passes to Underpayment of Federal Taxes
May 31, 2019 in Tax News
Every year, those who underpay their estimated tax are subject to penalty fees from the IRS. But this year, the number of Americans who underpaid may have dramatically increased, due to the Tax Cuts and Jobs Act and how that has affected withholding figures. Luckily for those that underpaid, the IRS is waiving penalties for some Americans who underpaid their 2018 federal taxes.
Why Did People Underpay Their Estimated Taxes in 2018?
Before we get into the tax relief the IRS is offering taxpayers, let’s look at why underpayment was such a problem this year.
The United States has what’s called a “pay-as-you-go” tax system, which means taxpayers must pay their taxes throughout the year. Yet, most Americans don’t even think about this, since their employer pays the IRS for them. If you’re traditionally employed, you fill out a W-4 when you’re hired, then your employer withholds taxes from each of your paycheck and sends them to the IRS for you.
Generally, this system works well for most Americans. But this year, the changes to the tax code caused by the passing of the Tax Cuts and Jobs Act shook things up as far as withholding goes. In early 2018, the IRS changed their withholding tables to be in line with the new tax code. This was a problem for American taxpayers who did not realize that withholding tables had changed and that they would need to review their W-4 to ensure that they were still withholding the correct amount.
Many people didn’t update their W-4 and, for some, that didn’t change much. But others ended up accidentally underpaying their taxes, which meant that they owed taxes on Tax Day and that they were subject to an underpayment penalty.
IRS Relief For Underpaying 2018 Estimated Taxes
Usually, the IRS will charge a penalty to anyone who pays less than 90% of their total tax liability for the year. But for the 2018 tax year, the IRS has lowered this figure to 80%, due to higher rates of underpayment. Switching this threshold amount is likely to aid millions of Americans who would otherwise be subject to the penalty.
IRS Commissioner Chuck Rettig said about this change, “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. The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld.”
The Commissioner went on to encourage taxpayers to avoid this same issue next year, saying, “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 threshold for the underpayment penalty was updated very recently in May 2019. If you already paid this penalty but would no longer need to under recently changed threshold, you can claim a refund by filling out IRS Form 843 and sending it to the IRS by mail (no electronic options are available).