The US tax authority has lowered the threshold to qualify for relief from penalties for failure to pay the correct amount of tax, in response to concerns that many Americans were confused by new requirements following President Trump’s major overhaul of the tax regime
The Internal Revenue Service (IRS) says the threshold for penalty relief to taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year is now set at 80%. This is down from the 85% originally announced at the beginning of the year, while the usual threshold is 90%.
This means that the IRS is now waiving the estimated tax penalty for any taxpayer who paid at least 80% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments, or a combination of the two.
The revised waiver computation will be integrated into commercially-available tax software and reflected in the forthcoming revision of the instructions for form 2210, underpayment of estimated tax by individuals, estates, and trusts.
Taxpayers who have already filed for tax year 2018 but qualify for this expanded relief may claim a refund by filing Form 843, claim for refund and request for abatement and include the statement ‘80% waiver of estimated tax penalty’ on line 7. This form cannot be filed electronically.
IRS Commissioner Chuck Rettig said: ‘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.’
In particular, the IRS said the waiver is designed to help taxpayers who did not properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017.
Usually, a penalty applies at tax filing if too little is paid during the year. This penalty is an interest based amount approximately equivalent to the federal interest on the amount not paid in a timely manner.
Normally, the penalty would not apply for 2018 if tax payments during the year met one of the following tests. The first is if the person’s tax payments were at least 90% of the tax liability for 2018 (now reduced to 80%).
The alternative is where the person’s tax payments were at least 100% of the prior year’s tax liability, in this case from 2017. However, the 100% threshold is increased to 110% if a taxpayer’s adjusted gross income is more than $150,000 (£113,500), or $75,000 if married and filing a separate return.
Relief from Addition to Tax for Underpayment of Estimated Income Tax by an Individual
Report by Pat Sweet
