Treasury cuts penalties for taxpayers confused about withholding

The government's second reduction in the penalty threshold this year comes as 2017 tax overhaul leaves many with surprise tax bills

Mar 22, 2019 @ 3:20 pm

By Bloomberg News

The Treasury Department is again reducing penalties for taxpayers who didn't pay enough of their tax bill throughout the year.

Taxpayers who paid at least 80% of their estimated tax liability for 2018 through paycheck withholding or quarterly estimated payments won't face Internal Revenue Service penalties this year, a senior Treasury official told reporters Friday.

Taxpayers typically pay fines if they don't cover at least 90% of their tax liability during the year.

It's the second time Treasury has reduced the penalty threshold for the first filing season following the passage of the 2017 Republican tax overhaul.

In January, Treasury announced it would remove penalties for taxpayers who'd made at least 85% of their payments during 2018. Changes to tax brackets, withholding tables and the child tax credit associated with the new law left some taxpayers asking for too little to be withheld, leaving them with surprise tax bills when they file their returns.

(More: 5 tips for people who don't have the money to pay their tax bill)

Taxpayers 'shocked'

The change follows requests from Nina Olson, the IRS' national taxpayer advocate, and two Democratic legislators, Rep. Judy Chu of California and Sen. Kirsten Gillibrand of New York, who pushed for legislation after hearing that confused taxpayers were getting hit with steep penalties for under-withholding.

Many taxpayers this year are "shocked to discover they owe hundreds or thousands of dollars to the IRS through no fault of their own, and could even face penalties," Ms. Chu said in a statement. "As tax filing season is in full swing, Treasury's action will relieve the financial anxiety facing worried taxpayers across the country."

Treasury Secretary Steven Mnuchin said in a statement on Friday that he was aware of bipartisan interest on the issue, and agreed that "further relief should be provided."

Taxpayers can also avoid underpayment penalties if they owe less than $1,000 or they paid 100% of the amount they owed in the prior year.

The Treasury official, who spoke on condition of anonymity, said he expects the change will eliminate fines for 25% to 30% of taxpayers who would have owed if the threshold had been left at 90%.

About 10 million to 12 million taxpayers paid underpayment penalties totaling about $1.6 billion in 2018. It's not yet clear whether more people will owe penalties this year, the official said.

Treasury will soon release a form for taxpayers who paid at least 80% to attach to their tax return that will exempt them from penalties. Those who've already filed their taxes and paid the penalties can request a refund from the IRS for the amount of the fines.

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