2019 has been a challenging tax year for the IRS. One of the biggest challenges for taxpayers has been the amount to withhold from their paychecks so that they do not owe or are subject to penalties this year.
The fact is that many more owed on 4/15 than in prior years (about 1.2 million by the Taxpayer Advocate’s count) – and many others who owe are yet to file their returns. Congress and the IRS cannot provide taxpayers relief from owing taxes, but they can provide some relief for taxpayers who underwithheld and are subject to the estimated tax penalty.
IRS provides relief
Here is where the confusion starts. To provide relief, the IRS lowered the threshold for the amount to withhold in order to avoid the estimated tax penalty on January 16, 2019, to 85% (from the statutory rate of 90%) for 2018 returns. This means that taxpayers who withheld 85% of their tax liability owed when filing did not owe the estimated tax penalty. This relief was timely as taxpayers had not yet begun to file their 2018 returns.
However, under more pressure, the IRS again lowered the threshold to 80%. This relief came on March 22, 2019 – after 84 million tax returns had already been filed. As a result, 400,000 taxpayers had already overpaid an estimated tax penalty. These taxpayers were given special instructions to file a Form 843, Claim for Refund and Request for Abatement, to request the expanded relief. Likely, many taxpayers were unaware of the ability to request the expanded relief and likely did not take advantage of the relief. Also, for some taxpayers, filing another confusing IRS form was probably not worth the effort.
IRS provides more practical relief
Enter the kinder, gentler, more customer service focused IRS. On August 14, 2019, the IRS announced that they were going to reduce the taxpayer’s burden and automatically refund taxpayers who overpaid their estimated tax penalty for 2018.
IRS refunds are coming soon
Through October, the IRS will be sending taxpayers an adjustment notice (IRS Notice CP 21) that shows the reduced penalty amount. Three weeks after the notice, the IRS will issue the taxpayer a check for the overpaid estimated tax penalty. Taxpayers who have already filed Form 843 will be incorporated into this automatic relief.
Don’t expect relief next year
The IRS has been on an extensive campaign this year to warn taxpayers about increasing their withholding if they owe or are subject to the estimated tax penalty. The 2018 tax return relief was a one-time gift from the IRS as a result of tax reform confusion. Taxpayers should not expect relief for their 2019 tax returns. The moral of the story: check your withholding or start making estimated tax payments. Review your tax return and your current year tax situation and avoid a surprise and a potential estimated tax penalty next year.