The IRS has announced a somewhat modest waiver of underpayments of 2018 estimated taxes in Notice 2019-11.
Due to changes in the tax law under the Tax Cuts and Jobs Act, the IRS modified the withholding tables and calculations. However, many employees simply used the withholding allowances they had used in the past rather than going through the IRS withholding calculator. As well, the calculator does not necessary properly take all situations into account.
For this reason, there has been concern expressed that certain taxpayers may end up being underwithheld on their 2018 taxes primarily due to the combination of the change in taxes under TCJA and the revised withholding tables. In response to concerns about this issue voiced by various parties, the IRS has now responded with its relief—but that relief only works if the taxpayer is mildly underwithheld.
As the notice points out, generally under §6654(d)(1)(B) a taxpayer must have paid in an amount equal to the lesser of 90 percent of the tax ultimately determined to be due or either 100% or 110% (based on income) of the prior year’s taxes. If that is not paid in, generally if the taxpayer owes $1,000 or more in tax, an underpayment of estimated tax penalty will apply.
In this notice, the IRS provides relief—but only for those that still end up with payments equal to or in excess of 85% of the total tax shown on the return.
Those who qualify for this waiver must take the following steps to take advantage of it:
To request this waiver, an individual must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his or her 2018 income tax return. The form can be filed with a return filed electronically or on paper. Taxpayers should complete Part I of Form 2210 and the worksheet included in the form instructions to determine if the waiver in this notice applies. If the waiver applies, check the waiver box (Part II, Box A) and include the statement “85% Waiver” with the return. Forms, instructions, and other tax assistance are available on IRS.gov. The IRS toll-free number for general tax questions is 1-800-829-1040. This waiver is in addition to any other exception that section 6654 provides to the underpayment of estimated income tax.
The notice provides that if a taxpayer falls short of the 85% number, they will still owe the same underpayment that normally would have been computed:
If neither the waiver provided by this notice nor any other exception applies to an individual taxpayer, the amount of the addition to tax is determined by applying the underpayment interest rate established under section 6621 of the Code to each required installment of estimated tax that was underpaid for the period that the installment is underpaid. The period of the underpayment runs from the due date for the installment to the earlier of April 15, 2019, or the date on which the underpayment is paid. This notice has no effect on determining the amount of each required installment for an individual whose total withholding and estimated tax payments do not equal or exceed eighty-five percent of the tax shown on that individual’s return for the 2018 taxable year.
This paragraph means that if the individual’s required payment is based on 90% of the tax due without regard to this notice, if that individual pays in an amount equal to 84.9% of the tax due, the penalty will be computed on the shortfall from the 90% level, not the 85% level.