IRS Waives 2018 Penalty For Not Withholding Enough

February 11, 2019
Wambolt Team

The IRS announced some good news for certain taxpayers. It is waiving underpayment penalties for certain taxpayers whose 2018 federal income withholding and estimated tax payments fell short of total taxes owed for the year. The estimated tax penalty will be waived for those taxpayers that have at least paid 85 percent of their total tax liability through withholdings and quarterly payments.

The waiver recognizes that the Tax Cuts and Jobs Act (TCJA), enacted in December 2017, brought with it a bevy of changes for taxpayers. These changes made it difficult for some taxpayers to determine what to withhold.

Among the changes was the amount of withholdings as calculated by revised tax tables. When the revised tax brackets were released under the new tax plan, many taxpayers calculated lower withholdings assuming less taxes owed. But the problem that arose was that other factors such as dependency exemptions and itemized deductions didn’t factor into the revised withholding tables.

Additional Information

Because the U.S. tax system is pay-as-you-go, taxpayers are required, by law, to pay most of their tax obligation 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, the announcement 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 today on IRS.gov.

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