Based on a combination of wage withholdings and quarterly tax estimates, the U.S. tax system utilizes a system that requires taxpayers to “pay-as-you-go,” as opposed to waiting until the end of the year to pay income taxes. Under the current law, if you fail to pay 90% of your current year tax, the results of your shortfall could be the imposition of penalties.
Under the Tax Cuts and Jobs Act of 2017, significant tax laws changes were made that, while combined the withholding rate adjustments, have resulted in a number of taxpayers underpaying on their income taxes for the 2018 tax year. While this is not necessarily unexpected, the IRS had continuously issued several warnings in 2018 for taxpayers to verify that their current withholdings were adequate.
The IRS issued Notice 2019-55 in January of this year, which reduced the amount of taxes from 90% to 85% that need to be paid through withholding and estimates to avoid any type of penalty. However, groups of taxpayers believe this tax reduction would still not sufficiently cover this underpayment issue.
The IRS has since stated that individuals who have paid at least 80% of their 2018 taxes through withholding and estimates will not be subject to any penalty for failure to pay their estimated taxes. The Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trust, will reflect this update in the next revision of instructions.
If you have already filed your tax return for 2018 and paid the penalty based on the previous law, you are eligible to claim a refund by filing Form 843, Claim for Refund and Request for Abatement. When filing, include the statement “80% Waiver of Estimated Tax Penalty” on Line 7. Please note: this form is not able to be filed electronically.
If you have any questions or believe you are eligible to claim a refund for paying the penalty, contact your local CRI tax advisor.