Earlier this month, the American Institute of CPAs formally requested the Internal Revenue Service (IRS) grant relief to taxpayers from certain tax penalties that were directly related to the Tax Cuts and Jobs Act (TCJA). This week, the IRS has granted that request, to an extent.
The IRS announced Wednesday it will waive the estimated tax payment penalty for taxpayers whose withholding and estimated tax payments are equal to or exceed 85% of the tax due for 2018. In case you are unfamiliar, each year taxpayers must pay at least 90% of the tax that will be owed the following April or 100% of the prior year tax due (110% for taxpayers with an adjusted gross income (AGI) that exceeds $150,000). This can be done through withholding and/or estimated tax payments throughout the year. Failing to meet these requirements, known as the safe harbor rules, result in an underpayment penalty.
Why is this waiver important? The TCJA adjusted income tax brackets and tax rates were lowered. Following the change to the tax law, the IRS then changed the withholding tables, lowering the federal income tax withheld from payroll checks. These changes made it difficult for taxpayers to determine the amount of his/her actual tax liability for 2018.
The penalty relief is not significant, but will assist in lowering or eliminating underpayment of estimated tax penalties by expanding the safe harbor rule from 90% to 85%.
The penalty relief only applies to individuals. The IRS has not commented on corporations at this time.