The IRS has expanded the safe harbor for underpayment penalty relief for a second time this tax season. Taxpayers who paid at least 80 percent of their annual tax liability throughout the year will not face underpayment penalties this year.
Underpayment Penalty Rules
The normal underpayment penalty rules have several safe harbors. The two most common safe harbors require taxpayers to do one of the following:
- Pay taxes throughout the year equal to 100 percent of your tax liability last year
- Pay taxes throughout the year equal to 90 percent of your tax liability for the current year.
The 90 percent threshold was first lowered to 85 percent for this tax season, and has now been lowered to 80 percent.
This expanded penalty relief program is temporary and only applies to this tax year. Review your withholdings or estimated tax payments to avoid underpayment penalties next year.
Why Some Taxpayers Underpaid
The massive changes caused by the Tax Cuts and Jobs Act (TCJA) caused some taxpayers to underpay throughout the year. Some taxpayers saw an increase in their take-home pay due to the TCJA, but were surprised to see smaller tax refunds or balances due on their tax return.
The elimination of personal and dependency exemptions and other changes lead to confusion about how much taxes should be withheld from a taxpayer’s paycheck. Some taxpayers also didn’t update their W-4 forms to reflect the changes under the TCJA.
If you already filed your tax return and are otherwise eligible for this penalty relief, you can claim a refund by filing Form 843, Claim for Refund and Request for Abatement.
Taxpayers who paid less than 80 percent of their taxes throughout the year will be charged underpayment penalties based on the usual 90 percent threshold.
What to Do If You Have a Balance Due
Penalty relief will help some taxpayers, but you may still face financial difficulties if you have an unexpected balance due. File your tax return, even if you can’t pay your full balance right away.
Pay as much as you can when you file. You may be able to pay off your remaining balance over time with an IRS installment agreement.
Contact a tax resolution attorney to discuss your options for paying off your tax debt.
The Gartzman Law Firm can help you with penalty relief and other tax resolution strategies. Use our contact form to request a consultation with an Atlanta tax resolution attorney