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The IRS has announced (Notice 2019-11 and IR-2019-03) that it is waiving the estimated tax penalty under Section 6654 for certain taxpayers who paid at least 85% of their total tax liability for tax year 2018 during the year.

Background

Under Section 6654, to the extent income taxes are not withheld, taxpayers are required to make estimated tax payments throughout the year in quarterly installments. If a taxpayer pays too little tax during the year, a penalty applies. To avoid the penalty, a taxpayer generally must pay during the year either: (1) 90% of the year's tax liability or (2) 100% of the prior year's tax liability (110% for taxpayers above a certain income threshold).

As a result of the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, a broad array of changes were made with respect to taxation of individual taxpayers in 2018. Although the IRS released updated withholding tables in February 2018, it remains concerned that some individual taxpayers may have had difficulty accurately calculating their estimated 2018 tax liability as a result of the TCJA changes.

Waiver of penalty

The IRS will waive the Section 6654 addition to tax for failure to make estimated income tax payments for the 2018 tax year otherwise required to be made on or before January 15, 2019, for any individual taxpayer whose total withholding and estimated tax payments made on or before January 15, 2019, equal or exceed 85% of the tax shown on that individual's return for the 2018 tax year. Accordingly, the IRS is lowering the threshold to avoid the penalty from the usual 90% of taxes owed to 85% for the 2018 tax year.

To request the waiver, taxpayers must file with their 2018 income tax returns a Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. Taxpayers should complete Part I of the form to determine if the waiver applies, and, if it does, check the waiver box in Part II and include the statement "85% Waiver" with the return.

If the waiver does not apply (and nor does any other exception), taxpayers must determine the amount of the addition to tax by applying the underpayment interest rate established under Section 6621 to each required installment of estimated tax that was underpaid for the period that the installment is underpaid. The new waiver 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 85% of the tax shown on that individual's return for the 2018 tax year.

Implications

The IRS's decision to offer Section 6654 penalty relief to individuals is welcome news for taxpayers. Taxpayers should pay special attention to the instructions for requesting the "85% Waiver," including the filing of Form 2210, in order to ensure that they qualify for relief. Although this relief under Notice 2009-11 is only available for 2018, taxpayers should review their 2019 withholding and estimated tax payments to ensure they will not be subject to the estimated tax penalty.

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