IRS Reduces Penalties for Taxpayers Under-withholding taxes

The IRS lowers under-withholdi penalty to 80%

IRS reduces under-withholding penalty

In March, taxpayers who under-withheld their federal tax in their paychecks got a reprieve from the IRS. The agency recognized that many taxpayers were confused about the amount they needed to withhold.

Last year, the Government Accountability Office predicted more than one in five taxpayers would probably not withhold enough from their paychecks. Early reports show many taxpayers did indeed not change their withholdings.

Due to the confusion, many accounting and industry groups called for a lessening of the penalty threshold. Last month, the IRS reduced the under-reporting penalty threshold to 80%. In prior years, the threshold was 95%.

What this means for you: if you paid at least 80% of the federal taxes you owed, you will not owe any penalty.

You will also not owe an under-withholding penalty if you:

  • Owe less than $1,000 in taxes
  • Had an AGI (adjusted gross income) of $150,000 or less and you filed jointly as a married couple (or $75,000 or less if filing as a single or married and filing separately) and withheld at least 100% of your 2017 tax liability
  • Had an AGI above $150,000 (married couple) or $75,000 (single or married and filing separately) and you withheld at least 110% of your 2017 tax liability
  • Did not have any tax liability for the 2017 tax year and did not need to file a return

The IRS also will also waive the penalty for unique situations it deems as a reasonable excuse (personal casualty or an unusual situation) and not intentional neglect.

How to Handle the Under-withholding Penalty

If you filed prior to March and now qualify for the reduced penalty threshold, you should file IRS form 843 (the Claim for Refund and Request for Abatement.”

On the form’s line 7, write this statement “80% waiver of estimated tax penalty.” You must mail this form to the IRS. You cannot file it electronically. You will find the address for mailing your form at the end of the IRS instructions for Form 940.

If you hired a tax professional to complete your taxes and you qualify for the reduced penalty, contact the preparer and ask the pro to revisit your return.

If you have not yet filed, your accountant or your up-do-date tax software will incorporate the change.

Make Sure You Withhold Enough in 2019

Once you complete your return, it is a good time to check your withholding to make sure your employer withholds the correct amount for taxes.

According to the IRS, these situations could indicate you should change your withholding. You:

  • Had a large refund in 2018 (this is like giving a no-interest loan to the government, not good)
  • Owed a large balance to the government in taxes
  • Took the standard deduction, where in the past you itemized
  • Had a major life change (marriage, new baby, divorced, etc.)
  • Earn outside income not covered by withholding
  • Started to receive social security or a pension

Another approach to withholdings is to make sure you meet the previous year’s minimum. If you expect your AGI will be less than $150,000 as a couple (or $75,000 as a single filer) withhold at least 100% of your 2018 federal taxes in 2019

If your AGI is higher than the amounts above, withhold at least 110% of your 2018 federal taxes in 2019.

You make changes to your withholding my changing the number of allowances you claim on your W-4.

Not sure how to calculate your tax withholding?

The IRS offers a withholding calculator on the agency’s website at this link:

Do keep in mind that the results on the calculator are only as good as the numbers you enter. If you need help determining your proper withholding, please contact us.

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