In 2018, taxpayers enjoyed an increase in take-home pay as a result of revisions to the Internal Revenue Service (“IRS”) withholding tables that decreased the amount of federal income taxes withheld from their paychecks. The revisions to the withholding tables were made to reflect changes from the Tax Cuts and Jobs Act of 2017 (“TCJA”).1 The TCJA was billed as the largest tax cut since 1986. Many taxpayers were expecting lower tax bills and larger refunds. Not realizing the source of their largess, they were surprised to learn not only that they owed additional taxes and would not be getting a refund, but also that they owed penalties as a result of failing to make sufficient estimated tax payments during the year.
In January 2019, the IRS announced that it would waive estimated tax penalties for any taxpayer whose withholdings and estimated tax payments made on or before January 15, 2019, equaled or exceeded 85% of the tax liability shown on the taxpayer’s 2018 return.2 In March, the IRS expanded eligibility for penalty relief by lowering the percentage of tax required to be paid through withholdings and estimated tax payments made on or before January 15, 2019, from 85% to 80%.3 The relief offered was not automatic. To claim relief, taxpayers had to filed newly created Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with their 2018 returns.4
Many taxpayers who were otherwise eligible for expanded penalty relief had already filed their 2018 returns and paid the tax and estimated tax penalty due by the time the expanded penalty relief was announced in March. The newly issued guidance ensures that taxpayers fully benefit from the relief provided by granting automatic refunds to eligible taxpayers without the necessity of filing a claim for refund.5
Background on Estimated Tax Payments and Penalty
Congress requires individual taxpayers to pay almost their entire tax liability during the year it is earned rather than wait until the return is filed April of the following year. The obligation to “pay-as-you-go” the year protects taxpayers from getting to the date payment is due and fining that they did not save enough money to pay their tax bill.
Section 6654 establishes the amount of income tax and self-employment tax that individuals must be prepaid during the year, and it imposes a penalty for underpaying the required amount. Subject to various exceptions discussed below, individuals are generally required to prepay 90% of their current year’s tax liability.6 If a taxpayer fails to adequately prepay his or her tax liability during the year, a penalty is imposed by applying the underpayment rate under section 6621 to the amount of the underpayment of estimated tax for the period of the underpayment.7 For calendar year taxpayers, quarterly estimated payments are due on the 15th day of April, June, and September of the current year and the 15th day of January of the following year.8
Taxpayers whose only source of income is wages usually satisfy their prepayment obligations through withholdings. Congress requires employers to withhold income taxes from the wages of their employees. Employers determine the amount to be withheld from an employee based on IRS withholding tables that take into account the employee’s wages, filing status, and number of dependents he or she is eligible to claim. This information is reported to the employer on Form W-4, Employees Withholding Allowance Certificate. If a taxpayer accurately completes Form W-4 and has no income other than wages, they will usually satisfy the 90% requirement under section 6654. If taxpayers have significant income other than wages, including income from self-employment, they must make quarterly estimated tax payments to satisfy their prepayment obligations and avoid penalty.
The penalty under section 6654(a) is subject to various exceptions.9 In addition, the IRS has authority to waive the penalty under section 6654(a) if it determines that “by reason of casualty, disaster, or other unusual circumstances [imposition of] the penalty would be against equity and good conscience.”10
Background – TCJA
In 2018, the IRS adjusted withholding tables to reflect changes to standard deductions, personal exemptions, tax rates, and other changes made by the TCJA. The TCJA essentially doubled the standard exemption in effect at the time from $6,500 to $12,000 for single individuals and from $13,000 to $24,000 for married couples filing jointly. At the same time, the TCJA suspended personal exemptions, eliminated or revised many itemized deductions, and adjusted marginal tax rates and the taxable income to which the rates apply. The revised withholding tables resulted in a decrease in amounts required to be withheld, in part, because they do not account for the suspension of personal exemptions or the reduced availability itemized deductions. Although the IRS cautioned that taxpayers could be subject to large tax bills when they released the revised withholding tables, many individual taxpayers were caught off-guard by the affect the change had on their tax bills when the time came to file their returns.
In Notice 2019-11, the IRS provided a waiver of the penalty under section 6654 for the underpayment of estimated income tax for certain individuals who would otherwise have been required to make estimated income tax payments for 2019 on or before January 15, 2019. The waiver was limited to individuals whose total withholding and estimated tax payments equaled or exceeded 85% of the tax shown on their 2018 return. To obtain the relief granted by Notice 2019-11, an eligible taxpayer was required to file Form 2210 with their 2018 return. The form was released in draft form on January 16, 2019.
In Notice 2019-25, the IRS expanded the relief available under Notice 2019-11 by reducing the percentage of tax shown the return that was required to be withheld or paid to the IRS on or before January 15, 2019, from 85% to 80%. As with Notice 2019-11, individuals eligible for relief under Notice 2019-25 were required to file Form 2201 with their 2018. The IRS recognized, however, that some individuals who qualified for relief under Notice 2019-25 may have already paid estimated tax penalty under section 6654 for the 2018 taxable year. In such case, the notice instructed taxpayers to file a Form 843, Claim for Refund and Request for Abatement, with the statement “80% Waiver of estimated tax penalty” to claim a refund.
On August 14, 2019, IRS announced that it is “automatically waiving the estimated tax penalty for the more than 400,000 eligible taxpayers who already filed their 2018 federal income tax returns but did not claim the waiver.”11 The waiver will apply to all eligible taxpayers.12 Over the next few months, the IRS will mail notice to affected taxpayers informing them of the relief granted. Any eligible taxpayer who has already paid the penalty should expect a refund check approximately three weeks after the notice is mailed. For taxpayers that have yet to file returns, the IRS notes that the quickest and easiest way to claim relief is to file Form 2210 with their 2018 return. Finally, the notice urges taxpayers to review their withholdings to avoid unexpected large tax bills in the future.
- Pub. L. 114-97 (Dec. 22 ,2017).
- Notice 2019-11, 2019-5 IRB 430 (Jan. 16, 2019).
- Notice 2019-25, 2019-15 IRB 942 (March 22, 2019).
- Notice 2019-144, 2019-__ IRB__ (August 14, 2019).
- IRC § 6654(d)(1)(B)(i). The required annual installment is the lesser of (i) 90% of the tax shown on the return for the taxable year, or (ii) 100% of the tax shown on the taxpayer’s return for the preceding taxable year (110% if the individual’s adjusted gross income shown on the previous year’s return exceeded $150,000), so long as the preceding taxable year was a full 12 months. Id.
- IRC § 6654(a).
- IRC § 6654(c). Income taxes withheld from wages are deemed to be paid evenly throughout the year, unless the taxpayer establishes the dates on which the amounts were actually withheld. IRC § 6654(g).
- See IRC § 6654(e)(1) (providing that the penalty under section 6654(a) will not apply if the taxpayer owes less than $1,000 in tax, after subtracting tax withheld on wages); see also IRC § 6654(e)(2) (providing an exception that applies if the individual did not have any tax liability for the previous year, the previous year consisted of a full 12 months, and the individual as a citizen or resident of the United States throughout the year).
- IRC § 6654(e)(3).
- IR-2019-144 (Aug. 14, 2019) (available at https://www.irs.gov/newsroom/irs-automatically-waives-estimated-tax-penalty-for-eligible-2018-tax-filers).
- Notice 2019-144 does not change the eligibility standards for penalty relief established by Notice 2019-25.