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IRS Broadens Penalty Relief for Underpayment of Estimated Tax for 2018

(Parker Tax Publishing March 2019)

The IRS modified previous guidance, which had waived the penalty under Code Sec. 6654 for the underpayment of 2018 estimated individual income tax. Notice 2019-25 supersedes Notice 2019-11 and (1) reduces the percentage threshold for penalty relief to individuals whose total withholding and estimated tax payments equal or exceed 80 percent of their total tax liability for 2018, (2) provides updated procedures for requesting the penalty waiver, and (3) provides procedures for taxpayers who paid the penalty for tax year 2018, but who qualify for relief, to request a refund. Notice 2019-25.


Generally, taxpayers must pay federal income taxes as they earn income and, to the extent these taxes are not withheld, a taxpayer must pay estimated income tax on a quarterly basis. Code Sec. 6654 provides that, in the case of an individual, estimated income tax is required to be paid in four installments and the amount of any required installment is 25 percent of the required annual payment. Generally, under Code Sec. 6654(d)(1)(B), the required annual payment is the lesser of (1) 90 percent of the tax shown on the return for the tax year, or (2) 100 percent of the tax shown on the taxpayer's return for the preceding taxable year (110 percent if the individual's adjusted gross income on the previous year's return exceeded $150,000), so long as the preceding tax year was a full 12 months long. However, an individual may not use the tax for the preceding tax year to calculate the required estimated tax payments if that tax year was not 12 months long, or the individual did not file a return for that preceding tax year.

Under Code Sec. 6654(d)(2), the amount of the required installment is the annualized income installment for those taxpayers who establish that such amount is lower than 25 percent of the required annual payment determined under Code Sec. 6654(d)(1). Pursuant to Code Sec. 6654(g), income taxes withheld from wages are deemed to be paid evenly throughout the tax year, unless the taxpayer establishes the dates on which the amounts were actually withheld. Code Sec. 6654(a) imposes an underpayment of estimated tax penalty for failure to make a sufficient and timely payment of estimated income tax.

An individual taxpayer is not subject to the underpayment of estimated tax penalty if an exception or waiver provision applies. Under Code Sec. 6654(e)(1), the underpayment penalty is not imposed on an individual taxpayer if the taxpayer owes less than $1,000 in tax, after subtracting tax withheld on wages. Under Code Sec. 6654(e)(2), an individual is not subject to the underpayment penalty if the individual did not have any tax liability for the previous year, the preceding tax year was 12 months, and the individual was a citizen or resident of the United States throughout the preceding tax year. In addition, the IRS is authorized by Code Sec. 6654(e)(3)(A) to waive the underpayment of estimated tax penalty if it determines that, by reason of casualty, disaster, or other unusual circumstances, the imposition of such penalty would be against equity and good conscience.

As a result of the numerous changes made by the Tax Cuts and Jobs Act of 2017, the IRS released an updated Withholding Calculator on and a new version of Form W-4 to help individual taxpayers determine the appropriate amount of 2018 tax withholding. According to the IRS, despite the release of the updated Withholding Calculator and new Form W-4, some individual taxpayers may have been unable to accurately calculate the amount of their required estimated income tax payments for the 2018 tax year. Accordingly, the IRS is providing additional relief to individual taxpayers by waiving certain penalties if taxpayers meet the applicable requirements.

Waiver of Underpayment of Estimated Tax Penalty for Some Taxpayers for 2018 Returns

In Notice 2019-25, the IRS provides that the underpayment of estimated tax penalty for the 2018 tax year for payments otherwise required to be made on or before January 15, 2019, is waived for any individual whose total withholding and estimated tax payments made on or before January 15, 2019, equal or exceed 80 percent of the tax shown on that individual's return for the 2018 tax year.

Compliance Tip: To request this waiver, an individual must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his or her 2018 income tax return. The form can be filed with a return filed electronically or on paper. Taxpayers should complete Part I of Form 2210 and the worksheet included in the form instructions to determine if the waiver in Notice 2019-25 applies. If the waiver applies, check the waiver box (Part II, Box A), include the statement "80% Waiver" next to Box A, and file page 1 of Form 2210 with the return. This waiver is in addition to any other exception that Code Sec. 6654 provides to the underpayment of estimated income tax.

Taxpayers who qualify for relief under Notice 2019-25 may have already paid penalties under Code Sec. 6654 for tax year 2018. If the waiver under Notice 2019-25 applies and the taxpayer has already paid the penalties for the 2018 tax year, the taxpayer may claim a refund by filing Form 843, Claim for Refund and Request for Abatement. Taxpayers should complete the form and include the statement "80% Waiver of estimated tax penalty" on Line 7.

If neither the waiver provided by Notice 2019-25 nor any other exception applies to an individual taxpayer, the amount of the addition to tax is determined by applying the underpayment interest rate established under Code Sec. 6621 to each required installment of estimated tax that was underpaid for the period that the installment is underpaid. The period of the underpayment runs from the due date for the installment to the earlier of April 15, 2019, or the date on which the underpayment is paid. Notice 2019-25 has no effect on determining the amount of each required installment for an individual whose total withholding and estimated tax payments do not equal or exceed 80 percent of the tax shown on that individual's return for the 2018 tax year.

Notice 2019-25 modifies and supersedes the guidance provided in Notice 2019-11.

For a discussion of the penalties on underpayments of estimated taxes, see Parker Tax ¶262,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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