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IRS Provides Additional Penalty Relief

In a March 22, 2019 Notice, the U.S. Internal Revenue Service expanded its previously announced relief for taxpayers who unintentionally underpay their taxes.

Under the tax code, taxpayers are expected to pay taxes due either through withholding or quarterly estimated tax payments.  If the taxes paid through those means turn out to be less than the taxes actually owed, an underpayment penalty is applied.  However, under the law, the penalty is waived if payments through withholding or estimated tax equal at least 90% of the current year tax owed, or 100% of the tax owed for the previous year.

Due to changes in the Tax Cuts and Jobs Act (TCJA) that took effect in 2018, some taxpayers who did not proactively change their withholding were under-withheld and owe additional taxes.  Others made insufficient estimated tax payments because they did not account for changes, such as the new $10,000 limitation on the deduction for state and local taxes.

The IRS had earlier announced that it would reduce the 90% threshold for avoiding penalties to 85%.  Responding to considerable concerns on the part of legislators and others, it has now reduced the threshold to 80%.  The Treasury Department estimates that at least 25% to 30% fewer taxpayers will owe penalties as a result of the relief granted.  

Transferees are among groups of taxpayers more likely than others to have been adversely impacted by the TCJA despite lower tax rates, due to loss of the moving expense deduction and other deduction limitations.  Additional penalty relief for such taxpayers is welcome.

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Saturday, 24 February 2024