IRS Waives Penalties for Some Underpayments of Estimated Tax
As a general rule, taxpayers are required to pay their federal taxes as they earn income. To the extent these taxes are not withheld, a taxpayer must pay estimated income taxes on a quarterly basis.
Internal Revenue Code (I.R.C.) § 6654 provides that, in the case of an individual taxpayer, estimated income taxes are required to be paid in four installments for the year to which the estimated taxes relate. Each required installment payment is 25% of the required annual payment. Pursuant to I.R.C. § 6654(d)(1)(B), the amount of the required annual payment is the lesser of (i) 90% of the tax shown on the taxpayer’s 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 adjusted gross income on the previous year’s return exceeded $150,000.00). If a taxpayer fails to make sufficient and timely payments of estimated income tax, either through withholding or estimated quarterly payments, a penalty is imposed.
The 2017 Tax Cuts and Jobs Act included numerous changes to the Internal Revenue Code affecting millions of taxpayers. On February 28, 2018, the Internal Revenue Service (IRS) released an updated Withholding Calculator (see IRS.gov) and a new version of Form W-4 to help individual taxpayers determine their correct amount of withholding. Despite these two releases, individual taxpayers may have been unable to accurately calculate the amount of their required estimated tax payments for 2018. Realizing this problem exists, the IRS is providing additional relief to individual taxpayers by waiving certain penalties.
In Notice 2019-11, the IRS announced that, pursuant to its authority under I.R.S. § 6654(e)(3)(A) (allowing the IRS to waive the penalty if “the imposition of such addition to tax would be against equity and good conscience”), the penalty under I.R.C. § 6654 for failure to make estimated income tax payments for the 2018 year, otherwise required to be made on or before January 15, 2019, is waived for any individual whose total withholding and estimated tax payments that were made on or before January 15, 2019, equal or exceed 85% of the tax shown on the individual’s 2018 tax return.
The relief provided under I.R.C. § 6654(e)(3)(A) is a waiver of penalty and the individual must request the waiver. To request the waiver, an individual must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, with the taxpayer’s 2018 income tax return.