The Tax Cuts and Jobs Act (TCJA) meant big tax changes for 2018 tax filings. For some, the changes impacted tax withholdings. As a result, the Internal Revenue Service (IRS) encouraged taxpayers to conduct a paycheck checkup to make sure they were withholding enough funds to cover their tax obligations. Those who failed to cover at least 90% of their tax bill through withholdings found themselves facing the potential for big financial penalties.
Why the penalties?
The United State tax system is a pay as you go system. The government expects taxpayers to pay their taxes throughout the year, not just in one lump sum at the end of the year. Since the tax obligation can vary a bit year to year, the agency generally allows taxpayers to be off by approximately 10% without any fees. Any variance that is greater than 10% can result in a fine and other tax compliance issues.
The TCJA left some taxpayers with withholdings that did not properly match their tax obligations. Those who failed to make changes found themselves facing a tax bill that was greater than 10% of the tax obligation for the year. As a result, the taxpayers could be subject to fines.
The IRS recently announced that it will automatically waive the estimated tax penalty for many taxpayers who filed 2018 tax returns without claiming the waiver. The announcement could translate to big savings for taxpayers.
Who qualifies for the waiver?
The IRS announced it would lower the threshold from 90% to 80%. The agency states the change will impact over 400,000. The IRS further states it will review all tax filings and will automatically apply the waiver without any action required by the taxpayer.