In March, the IRS announced that taxpayers who paid in at least 80% of their 2018 tax liability throughout the year would not face underpayment penalties. This was offered as relief from the normal threshold of 90% of tax liability and was granted by the IRS in response to confusion around recent tax law changes. However, with most common tax forms required for filing being issued by the end of January, many taxpayers had already filed their returns before this relief was announced.
If the tax they had paid in, whether through traditional withholdings or quarterly estimates, was not enough to cover their 2018 liability, they would have had their penalty calculated based on the regular threshold of 90%, thereby potentially paying a penalty they no longer owed after the lowering of the threshold.
Thankfully, on August 14th, the IRS announced it would be issuing refunds to individuals who paid undue penalty because of early filing. In its recent news release, the IRS states that there are hundreds of thousands of taxpayers who filed their 2018 returns without claiming the penalty waiver. “The IRS will apply this waiver to tax accounts of all eligible taxpayers, so there is no need to contact the IRS to apply for or request the waiver,” said the agency. Those who qualify will receive notices by mail in addition to a refund of penalties paid.
This move by the IRS will ensure that those who are eligible receive refunds while also easing the administrative burden of handling the issue on a case-by-case basis. It is important to note that this relief only applies to the 2018 tax year as of now, so taxpayers are still required to pay in at least 90% of their 2019 tax liability to avoid underpayment penalties.
Of course, the best-case scenario for taxpayers is to avoid interest and penalties altogether by ensuring they have paid in enough tax throughout the year and by filing their return on a timely basis. Not only does the IRS impose a penalty on taxpayers who are underpaid, but it also charges interest on unpaid liability if the tax due is not remitted by the April 15th filing deadline. This means that even if a taxpayer files an extension by April 15th, moving their filing deadline from April to October, they are still required to pay in any tax that may be due by April 15th with the filing of their extension.
Because of this, taxpayers should be sure to estimate their tax liability as accurately as possible when deciding whether an additional payment should be made upon filing an extension. If they remain underpaid when their extended return is filed, they could face underpayment penalty, late payment penalty, and interest charged on the tax due.
Finally, if a taxpayer does not file their tax return or an extension by April 15th, or if they file an extension and then do not file their tax return before October 15th, they can face an additional penalty for late filing. For any questions regarding when to file, how much estimated tax to pay, and how to avoid penalties, contact your HORNE tax advisor.