Failure to pay enough income tax into the federal system during the associated tax year can result in the IRS imposing a penalty upon the taxpayer. Typically, so long as the taxpayer pays ninety percent (90%) of their estimated tax liability, either through payroll withholding, by making estimated payments, or a combination of the two, the IRS will not impose a penalty. In January of 2019, the IRS announced increased relief for those taxpayers who did not meet their required tax payments during the 2018 calendar year by reducing the safe harbor threshold to eight-five percent (85%). But now, based on recent IRS communications, the threshold has been further reduced to eighty percent (80%). This means that so long as a taxpayer funded at least eighty percent (80%) of their 2018 tax liability through withholding and/or estimated tax payments, the IRS will not impose the penalty. This IRS took this course of action in response to commentary from the tax community regarding the unique circumstances taxpayers faced for the 2018 tax year as a result of the Tax Cuts and Jobs Act. Taxpayers that already filed for 2018 but who also qualify for this expanded relief from the penalty should file IRS Form 843.
Taxpayers are further urged to pay careful attention to their 2019 tax liability so as to ensure proper amounts are timely remitted to the IRS. As a reminder, the U.S. tax system is “pay as you go” meaning taxpayers are required to pay most of their tax obligation during the year, rather than “catching up” at year-end. Penalty forgiveness at reduced thresholds is not expected to be available next year and as such, those taxpayers dealing with complicated circumstances should be working closely with their tax counsel to ensure their tax obligations are timely satisfied. Taxpayers may need to adjust their 2019 withholding, or otherwise may have to increase their estimated payments, to avoid getting saddled with the penalty for calendar year 2019.