IRS Loosens Tax Penalty for Millions

Tobie Stanger

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Consumer Reports has no financial relationship with advertisers on this site.

The IRS said Friday that because of changes and confusion caused by the new Tax Cuts and Jobs Act, it will penalize fewer taxpayers who didn’t withhold enough federal taxes in 2018.

Before the ruling, taxpayers who had arranged to have their employers withhold just 85 percent of what they really owed would have been subject to an underpayment penalty. Now the threshold drops to 80 percent, the IRS says. In more typical tax years, most taxpayers must pay at least 90 percent of their federal taxes for a given year, or 100 percent of what they owed the year before, to avoid an underpayment penalty.

The change comes in response to public outcry. As the tax season progressed this year, reports of taxpayer outrage at lower refunds and higher-than-expected tax bills suggested far more people than expected were caught unawares.

In its announcement today, IRS Commissioner Chuck Rettig acknowledged that development, saying, “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

The new, lower threshold also applies to those who paid estimated taxes for 2018, including self-employed people and retirees.

People who filed their taxes already and paid the underwithholding penalty may now be eligible to request a portion or all of that penalty refunded.

Those who prepare their own taxes electronically and haven’t yet filed won’t have to take any extra steps. They should wait a few days to file, however, to ensure that their tax-prep program reflects the change.

Responding to Public Outcry

“We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” Rettig said. The commissioner then urged taxpayers to check their withholding for 2019 to make sure they are having the right amount of tax withheld for this year.

“We’ve been on record calling for the IRS to do this,” says Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, a conservative tax policy organization based in Washington, D.C. “We’re very happy to see the news.”

Mark Steber, chief tax officer at Jackson Hewitt Tax Service, says few clients of the company’s storefront tax-prep offices have had to pay the underwithholding penalties. “Year-to-date, the majority of our clients were due a refund,” he says. “For the small portion of clients who had a significant balance due, Jackson Hewitt helped them on a case-by-case basis.”

A spokesperson for H&R Block said, “We are working to identify which clients may need to claim a refund for overpayment penalty given today’s IRS announcement.”

What You Can Do

Here’s what to do if you think you’re liable for an underwithholding penalty:

• If you haven’t done your taxes already, you don’t need to do anything. The IRS says that its change will be incorporated into commercially available tax-prep programs for consumers and professionals. If you were about to file, however, wait a few days for your tax software to reflect the change. Intuit, the maker of TurboTax, for instance, said the changes would be reflected in its do-it-yourself products by the middle of next week.

• If you prepared your taxes on paper and already sent in your return, check the updated instructions on Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts [PDF] for details on how to proceed.

• If you prepared your taxes yourself and filed electronically, download and print out IRS Form 843, Claim for Refund and Request for Abatement [PDF]. Fill it out by hand and include the statement, “80% waiver of estimated tax penalty” on Line 7. Then send it to the IRS via postal mail. Find the address that applies to your area at the end of the instructions for Form 1040 [PDF].

• If you paid a tax preparer, ask how much he or she would charge to revisit your return in order to get the refund, says Mike Savage, CPA and chief executive of 1-800Accountant, a virtual accounting firm. You’ll then have to decide whether it’s worth the fee. “Is it worth it to pay $100 for a $350 refund claim?” Savage asks.



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