Tag Archives: TCJA

IRS waives 2018 underpayment tax penalties for many taxpayers

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The IRS has some good news for certain taxpayers — it’s waiving underpayment penalties for those whose 2018 federal income tax withholding and estimated tax payments came in under their actual tax liabilities for the year. The waiver recognizes that the Tax Cuts and Jobs Act’s (TCJA’s) overhaul of the federal income tax regime made it difficult for some taxpayers to determine the proper amount to have withheld from their paychecks or include in their quarterly estimated tax payments for 2018.

The new tax system

Many taxpayers started seeing more money in their paychecks in February 2018, after their employers made adjustments based on the IRS’s updated withholding tables. The revised tables reflected the TCJA’s increase in the standard deduction, suspension of personal exemptions, and changes in tax rates and brackets.

The TCJA roughly doubles the 2017 standard deduction amounts to $12,000 for single filers and $24,000 for joint filers in 2018. It also eliminates personal exemptions, which taxpayers previously could claim for themselves, their spouses and any dependents. In addition, it adjusts the taxable income thresholds and tax rates for the seven income tax brackets.

But, as the IRS cautioned when it released the revised withholding tables, some taxpayers could find themselves hit with larger income tax bills for 2018 than they faced in the past. This is because of some of the changes described above, as well as the reduction or elimination of many popular tax deductions. The tables didn’t account for the reduced availability of itemized deductions (or the suspension of personal exemptions).

For example, taxpayers who itemize can deduct no more than $10,000 for the aggregate of their state and local property taxes and income or sales taxes. Itemizing taxpayers also can deduct mortgage interest only on debt of $750,000 ($1 million for mortgage debt incurred on or before December 15, 2017) and can’t deduct interest on some home equity debt.

The higher standard deduction and expansion of family tax credits may offset the loss of some deductions and the personal exemptions. Indeed, the IRS predicts that most 2018 tax filers will receive refunds.

Taxpayers, however, generally can’t be certain how the numerous TCJA changes will play out for them, putting them at risk of underpayment penalties for 2018. The Government Accountability Office last year estimated that almost 30 million taxpayers will owe money when they file their 2018 personal income tax returns due to under-withholding. Those particularly at risk include taxpayers who itemized in the past but are now taking the standard deduction, two-wage-earner households, employees with non-wage sources of income and taxpayers with complex tax situations.

Underpayment penalties

The tax code imposes a penalty (known as a Section 6654 penalty) if taxpayers don’t pay enough in taxes during the year. The penalty generally doesn’t apply if a person’s tax payments were:

  • At least 90% of the tax liability for the year, or
  • At least 100% of the prior year’s tax liability. (The 100% threshold rises to 110% if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.)

Taxpayers generally can also avoid the underpayment penalty if they owe less than $1,000 in additional tax after subtracting their withholding and refundable credits.

The 2018 waiver

The IRS’s waiver lowers the 90% threshold to 85% — the IRS won’t penalize taxpayers who paid at least 85% of their total 2018 tax liability. For those who paid less than 85%, the IRS will calculate the penalty as it normally would.

To request the waiver, a taxpayer must file Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” with his or her 2018 federal income tax return.

Shutdown concerns

The IRS already has indicated that it will issue refunds despite the government shutdown that has furloughed about 800,000 federal workers. The IRS is recalling some of its furloughed employees and plans to have about 46,000 of its employees back on the job in the coming days. Those employees represent only about 57% of its total workforce. These employees will be using newly updated systems and forms, which could result in further delays. In addition, they could face an onslaught of questions from taxpayers confused by the TCJA changes.

Moreover, the recalled employees won’t be paid during the shutdown, and declines in morale may hurt productivity. Unpaid workers at other federal agencies have called in sick at higher rates than usual since the government’s partial closure, and the union that represents IRS employees has sued the Trump administration over the pay issue.

Act now for 2019 taxes

The underpayment penalty waiver is effective only for 2018. The IRS is urging taxpayers to review their withholding now to ensure that the proper amount is withheld for 2019, especially taxpayers who end up owing more than expected this year. If you have questions regarding the waiver, please don’t hesitate to call us.

© 2019

Federal government shutdown creates tax filing uncertainty

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The IRS has announced that it will begin accepting paper and electronic tax returns for the 2018 tax year on January 28, but much remains to be seen about how the ongoing shutdown of the federal government will affect this year’s filings. Although the Trump administration has stated that the IRS will pay refunds during the closure — a shift from IRS practice in previous government shutdowns — it’s not clear how quickly such refunds can be processed.

Effects of the shutdown on the IRS so far

An estimated 800,000 federal government workers have been furloughed since December 22, 2018, due to the impasse between President Trump and Congress over funding for a southern border wall. The most recent contingency plan published for the IRS lapsed on December 31, 2018, but it provided that only 12.5% of the tax agency’s approximately 80,000 employees would be deemed essential and therefore continue working during a shutdown.

The furloughs are necessary because the standoff over the border wall has prevented the enactment of several of the appropriations bills that fund the federal government. Tax refunds aren’t paid with appropriated funds, but IRS employees are. In the past, the IRS hasn’t paid tax refunds during shutdowns because it didn’t have the appropriated funds it needed to pay the employees who process refunds. Trump administration attorneys, however, have determined that the agency can issue refunds during a shutdown.

The IRS likely will need far more than 12.5% of its employees on the job to process refunds when it starts accepting filings. In 2018, the IRS received 18.3 million returns and processed 6.1 million refunds in the first week of tax season. By just one week later, it had received 30.8 million returns and issued 13.5 million refunds. Even though the IRS has indicated that it intends to recall “a significant portion of its workforce” to work, it has provided few details, and those employees would have to work without pay. The IRS says it will release an updated contingency plan “in the coming days.”

TCJA complicates the picture

The implementation of the federal tax overhaul could further complicate matters for taxpayers. The 2018 tax year is the first to be subject to the Tax Cuts and Jobs Act (TCJA), which brought sweeping changes to the tax code, as well as new tax forms. Various TCJA implementation activities, such as the development of new publications and instructions, will continue because they’re funded by earlier appropriations legislation.

Be aware that taxpayers and their accountants may not be able to contact the IRS with questions. When the IRS’s main number on January 9 was called, this recorded message was received: “Live telephone assistance is not available at this time. Normal operations will resume as soon as possible.”

During the 2013 government shutdown, taxpayers also couldn’t receive live telephone customer service from the IRS, and walk-in taxpayer assistance centers were shuttered. At that time, the IRS website was available, but some of its interactive features weren’t. Treasury Secretary Steve Mnuchin has stated that the IRS will call back enough employees to work to answer 60% to 70% of phone calls seeking tax assistance during this shutdown, which could lead to widespread taxpayer frustration.

Tax filing deadlines are still in effect

Regardless of how IRS operations proceed, taxpayers still need to comply with the filing deadlines. Individual taxpayers in every state but Maine and Massachusetts must file by April 15, 2019; filers in those two states have until April 17, 2019. Individuals who obtain a filing extension have until October 15, 2019, to file their returns but should pay the taxes owed by the April deadline to avoid penalties. If you have questions about tax filing, please contact us.