With the 2018 deadline for filing of individual income tax returns just around the corner, taxpayers should be aware of the recent announcement by the Internal Revenue Service (IRS) of expanded relief from penalties for individuals whose 2018 federal income tax withholding and estimated tax payments fell short of their tax liability for the year. For most tax years, individuals must make payments of at least 90% of their tax liability in four installments during the year to avoid the imposition of penalties for failing to make estimated tax payments. In the new notice (issued on March 22, 2019), the IRS reduced this payment requirement to 80% for 2018 only.
The Tax Cuts and Jobs Act enacted in late December, 2017 included what the IRS referred to in its March 22, 2019 notice (Notice) of the penalty relief as a “broad array of changes to the Code affecting millions of taxpayers” (emphasis supplied). Although the IRS released an updated withholding calculator and a new W-4 form in late February, 2018 to help individuals determine their appropriate tax withholding for 2018, the IRS indicated that “some individual taxpayers may have been unable to accurately calculate the amount of their required estimated income tax payments for the 2018 tax year” (emphasis supplied). In a prior notice issued in January of 2019, the IRS had reduced the requirement to make payments during the year from 90% to 85% to qualify for the exception to the penalty. The Notice reduces the payment requirement from 85% to 80% of the actual taxes due for 2018 to assist taxpayers who had insufficient taxes withheld from their wages or who did not make sufficient estimated tax payments for 2018.
In order to qualify for the relief, the individual taxpayer must submit a Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his or her 2018 income tax form. In the Notice, the IRS indicated that the taxpayer should check a waiver box in Form 2210 to indicate eligibility of the waiver “due to tax reform or other reasons” and for the taxpayer to include the statement “80% Waiver” next to the waiver box. Although the newly updated instructions to Form 2210 include information about computation of the 80% Waiver to confirm the taxpayer is eligible for the penalty relief, the actual Form 2210 does not contain any dedicated place to include the required statement next to the waiver box. It will be interesting to see if the IRS denies penalty relief if the required statement is not included in the filed Form 2210.
For individual taxpayers who already filed their 2018 income tax returns and have been charged and paid penalties for not meeting the required threshold for 2018 tax payments, the Notice instructs them to file a Form 843, Claim for Refund and Request for Abatement” and to include the statement “80% Waiver of estimated tax penalty” on Line 7. Luckily, this tax form includes room for taxpayers to include this required statement on Line 7, which is a blank section in which the taxpayer must specify the reason(s) that support the claim for refund.
In summary, individual taxpayers should be aware of the expanded 2018 penalty relief that is provided in the Notice and they should follow carefully the instructions in the Notice to make sure that they qualify for the relief and properly claim the relief to which they are entitled. For individuals who use commercial tax preparation software to prepare their own returns, they should be sure and hit the “update software” button before finalizing and submitting their returns and they should confirm that the required statement as to the 80% waiver is included in the appropriate box on Form 2210 if they owe income taxes with their returns.