2018 Tax Underpayment Penalty Waiver Details

By Hope Patterson, CPA

January 31, 2019

The IRS has some good news for certain taxpayers. Recently, the IRS has decided to try and lessen the burden and waive the penalty for many whose tax withholding and estimated tax payments fell short in 2018.

The IRS announced it will be waiving the penalty for any taxpayer 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. Typically, the percentage threshold is 90 percent to avoid a penalty.

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 Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017.

The recent waiver computation announced will start to be integrated into commercially-available tax software and reflected in the forthcoming revision of Form 2210 and instructions. Individuals requesting this waiver must file Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” with their 2018 individual tax return; check the waiver box (Part II, Box A); and include the statement “85percent Waiver” with the return.

“We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” said IRS Commissioner Chuck Rettig. “We urge people to check their withholdings again this year to make sure they are having the right amount of tax withheld for 2019.”

The updated federal tax withholding tables, released in early 2018, largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally meant taxpayers had less tax withheld in 2018 and saw more in their paychecks.

However, the withholding tables couldn’t 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 during the year if they did not submit a properly revised W-4 withholding form to their employer or increase their estimated tax payments.

Because the U.S. tax system is pay-as-you-go, taxpayers are required, by law, to pay most of their tax obligations during the year, rather than at the end of the year. This can be done by either having tax withheld from paychecks or pension payments or by making estimated tax payments.

Usually, a penalty applies at tax filing if too little is paid during the year. Normally, the penalty would not apply for 2018 if tax payments during the year met one of the following tests:

  • The person’s tax payments were at least 90 percent of the tax liability for 2018 or
  • The person’s tax payments were at least 100 percent of the prior year’s tax liability, in this case from 2017. However, the 100 percent threshold is increased to 110 percent if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.

For waiver purposes only, today’s relief lowers the 90 percent threshold to 85 percent. This means that a taxpayer will not owe a penalty if they paid at least 85 percent of their total 2018 tax liability. If the 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. For further details, see Notice 2019-11, posted on IRS.gov.

If you have questions regarding this waiver, please don’t hesitate to contact your Windham Brannon tax advisor.