July 15, 2019

Our tax system requires most taxpayers to make regular payments to the IRS throughout the year. The tax return that is due to the IRS every April 15 shows the final amount of tax owed for the year, as well as the amount of tax already paid by, or on behalf of, the taxpayer. If the amount paid is less than the amount owed, the taxpayer could be liable for underpayment penalties. In January 2019, the IRS announced that it was expanding eligibility for waivers of underpayment penalties. Taxpayers who paid at least eighty-five percent of their final tax bill can have their entire underpayment penalty waived.

Ongoing Tax Payments

Federal income tax is a “pay-as-you-go” system. Taxpayers must pay tax on the income they earn as they earn it. Payments are due every quarter.

Employers can withhold taxes from their employees’ paychecks. The amount of withholding is based on information provided by each employee on Form W-4. Every quarter, employers must remit all amounts withheld from payroll.

Self-employed individuals must make their own quarterly estimated tax payments. The IRS provides remittance forms, or taxpayers can pay with a credit or debit card through various online services, usually for a fee.

Underpayment Penalties

The standard federal income tax return requires taxpayers to disclose all taxable income received during the year. They must then calculate their total tax bill based on that amount, once they have applied any available deductions or credits.

Ideally, the amount of tax owed will be roughly equal to the amount already paid throughout the year. The next best option is a bill showing that the taxpayer owes less than they have paid. In one sense, this means that the taxpayer gave the federal government an interest-free loan. A more optimistic way of looking at it is that the taxpayer will be receiving a refund check.

If the amount of the final tax bill is greater than the amount already paid, then underpayment penalties could be an issue. Taxpayers can use Form 2210 to determine whether or not they owe underpayment penalties. The IRS waives underpayment penalties automatically in certain situations, such as when the total underpayment amount is less than $1,000. It allows taxpayers to request a waiver in various circumstances, and it recently expanded some eligibility criteria.

Waiver of Underpayment Penalties for 2018

In January 2019, the IRS announced that it was waiving underpayment penalties for people who paid a substantial portion of their total taxes owed throughout the year. It said that this was in part because of changes made by the tax reform law passed in 2017.

Previously, a taxpayer could qualify for a waiver of the underpayment penalty if the total amount of tax paid during the year was at least ninety percent of the final tax bill. The IRS has now reduced that amount to eighty-five percent. Taxpayers can request the waiver by submitting Form 2210 along with their tax return. Most tax-payment software also includes Form 2210.

The tax advisors at Enterprise Consultants Group are available to answer your questions about federal and state taxes in California. Please contact us today online or at (800) 575-9284 to make an appointment to see how we can help you.