The Internal Revenue Service (IRS) announced on Wednesday that it is waiving a penalty for some Americans who may have unintentionally underpaid their 2018 tax liabilities.
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The waiver applies to taxpayers whose total withholding and estimated tax payments are at least 85 percent of the taxes they owe. The reason for the relief is because calculations were more likely to be inaccurate as a result of the new tax law.
“The lower rates in the Tax Cuts and Jobs Act reduced the amount taxpayers needed to withhold in their paychecks … Should they have marginally miscalculated their 2018 withholdings, this waiver ensures they will not face the standard penalty for underpaying their taxes,” the U.S. Department of Treasury’s Office of Public Affairs said in a statement.
During any given year, taxpayers can avoid the underpayment penalty if they paid withholding and estimated tax of at least 90 percent of the amount owed.
Throughout the year, the IRS and the Treasury urged Americans to check their withholding amounts, even providing an online calculator to do so. Experts warned that more people were at risk of having tax payments underwithheld under the new tax law, since employers were using W-4 forms already on file to calculate withholding amounts – which is problematic because the sweeping tax law changed everything from personal exemptions to the standard deduction.
The Tax Cuts and Jobs Act gave the Treasury Department authority to determine the withholding allowance structure because the old method was no longer suitable, and there was not enough time to issue a new W-4.
According to a simulation conducted by the Government Accountability Office (GAO) in August, which reviewed the revised federal tax withholding tables for 2018 implemented by the IRS and the Treasury Department, 21 percent of workers were at risk of having their taxes underwithheld – 3 million more than projections based on the old tax code. These individuals would be stuck with a bill instead of a refund check come April.
Only 6 percent of taxpayers are expected to have wages accurately withheld, while 73 percent are likely to have their taxes overwithheld. The former is three percentage points less than a simulation conducted using the same withholding structure and the old tax code.
As of October, about 70 percent of Americans had not checked their withholding over the previous six months, according to a survey from tax preparation service Liberty Tax, despite the IRS warnings.
For the 2019 tax season, the IRS said it will continue to use a form similar to the current W-4, thought added it would be implementing changes to the form in order to make the system more accurate and transparent.
The IRS on Wednesday urged taxpayers to check their withholding rates for 2019.
Despite an ongoing government shutdown, the agency this week also announced it would recall more than half of its furloughed workforce to help process refunds. Filing season officially opens on Jan. 28.