IRS expands underpayment and under-withholding relief

By Michael Cohn

The Treasury Department and the Internal Revenue Service said Friday they are lowering the withholding underpayment threshold to 80 percent to give more taxpayers relief from tax penalties if they didn’t withhold enough taxes from their paychecks last year in the wake of the Tax Cuts and Jobs Act.

The change applies to taxpayers whose total withholding and estimated tax payments for 2018 are equal to or greater than 80 percent of their taxes owed. The usual threshold for avoiding a tax penalty is 90 percent, but earlier this year the Treasury agreed to reduce the threshold to 85 percent. The Treasury and the IRS came under pressure from lawmakers to either waive the tax penalty for under-withholding entirely this year or lower it to 80 percent.

“I appreciate the bipartisan interest from members of Congress on this issue and agree that further relief should be provided to taxpayers,” said Treasury Secretary Steven T. Mnuchin in a statement. “Treasury is exempting even more taxpayers from the usual underpayment penalties in an effort to help those who attempted in good faith to meet their withholding obligations.”

Last year, the Treasury and the IRS urged taxpayers to use an online withholding calculator and the updated W-4 form to help them figure the right amount to withhold from their paychecks, but the calculator was difficult to use and required a great deal of guesswork, so relatively few taxpayers actually used it. In cases where taxpayers have marginally miscalculated their 2019 withholdings, the extra waiver should help more taxpayers avoid a penalty for underpaying their taxes. Upcoming guidance and updated Form 2210 instructions will give taxpayers more guidance on this relief and filing for penalty abatement. The Treasury is still urging taxpayers to check their withholding at to make sure they are withholding enough this year and are getting the full benefits of the new tax law.

The IRS said it would waive the estimated tax penalty for any taxpayer who paid at least 80 percent of their total tax liability in 2018 via federal income tax withholding, quarterly estimated tax payments or a combination of the two. The revised waiver computation will be integrated into commercially available tax software and reflected in an upcoming revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. Taxpayers who have already filed for tax year 2018 but qualify for the expanded relief will be able to claim a refund by filing Form 843, Claim for Refund and Request for Abatement and include the statement “80% Waiver of estimated tax penalty” on Line 7. The form cannot be filed electronically.

In Notice 2019-25, the IRS officially expanded the waiver. “We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig in a statement. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

Lawmakers praised the extra relief. Rep. Judy Chu, D-Calif., pointed out that she had received a commitment from Mnuchin to respond to her request for this relief during a House Ways and Means Committee hearing last week on the Treasury Department budget. She had made the same request in a letter last month with Rep. John Lewis, D-Ga., which followed a similar letter last July with 12 other Democratic members of the Ways and Means Committee asking the IRS to grant the relief. Chu also recently re-introduced legislation known as the Taxpayer Penalty Protection Act that would have lowered the penalty threshold to 80 percent had the Treasury not acted on the request. Senator Kirsten Gillibrand, D-N.Y., introduced similar legislation in the Senate earlier this year.

“Families depend on their tax refunds each year to pay down bills, make ends meet, and save for the future,” Chu said in a statement. “But this year, the reality for many is much different as they 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. I have been concerned about this issue since the passage of the Republican tax law. That’s why I introduced the Taxpayer Penalty Protection Act, to waive this penalty for more taxpayers. Even Nina Olsen, the National Taxpayer Advocate, confirmed to the House Ways and Means Committee that the confusion created by the new tax law could lead to many taxpayers facing a penalty and urged the government to act. As tax filing season is in full swing, Treasury’s action will relieve the financial anxiety facing worried taxpayers across the country. I am glad that Secretary Mnuchin responded to my request and acted in accordance with my legislation to make this change.”

Sen. Ron Wyden, D-Ore., the top Democrat on the Senate Finance Committee, also praised the announcement that taxpayers who paid at least 80 percent of their estimated taxes would not face penalties. “The Trump administration is taking a step to undo the harm the Republican tax law inflicted on millions of families whose taxes were under-withheld through no fault of their own,” he said in a statement. “Piling penalties on top of unexpectedly high tax bills while corporations and the wealthy reap a windfall would have been a slap in the face. It shouldn’t have taken nearly three months to provide additional relief to families facing financial anxiety, but I’m pleased the administration has taken the action we requested.”

Wyden noted that he first raised the issue of penalties for families whose taxes were under-withheld in a January letter to IRS Commissioner Charles Rettig. Wyden and Senate Minority Leader Chuck Schumer, D-N.Y., then led 39 Senate Democrats in a follow-up letter last month expressing concern that the 85 percent threshold wasn’t low enough.

Republicans also hailed the expanded relief. “I appreciate Commissioner Rettig’s consideration of bipartisan congressional feedback urging IRS to provide additional penalty relief to taxpayers for this tax-filing season,” Senate Finance Committee chairman Chuck Grassley, R-Iowa, said in a statement. “IRS has done a laudable job updating withholding tables to reflect the changes in tax law. But no withholding table will be 100 percent accurate for all taxpayers. Over the past year, the IRS implemented a campaign reminding Americans to check their withholding to ensure they’re paying the correct amount of tax throughout the year. This further relief for taxpayers is welcome news for taxpayers who weren’t fully prepared and may have been inadvertently under-withheld due to the significant changes made to the tax code following legislative reforms in the last Congress. The Tax Cuts and Jobs Act was the biggest change to the federal tax code in a generation. This is a reasonable approach in the first year after major reforms to allow taxpayers some flexibility to avoid paying unexpected penalties.”

U.S. tax refunds up 17% in latest data set, Mnuchin says

By Saleha Mohsin
Bloomberg News


Tax refunds in the U.S. jumped 17 percent week over week, Treasury Secretary Steven Mnuchin said.

Mnuchin didn’t provide further data or clarify which week he was speaking about, though IRS figures announced last Friday showed a 17 percent drop in the amount of the average tax refund during the week ended Feb. 15 versus the same period a year earlier.

“That basically gets us to the same level as last year,” Mnuchin said during a CNBC interview in London. “I would just emphasize that even if people have perfectly done their withholding, people really should be focused on paying lower taxes and those lower taxes are money back into the economy and that’s why we have the economic growth that we do.”

A Treasury spokeswoman said Mnuchin was referring to a rise in the average size of tax refunds for the week ended Feb. 15. An IRS spokesman didn’t immediately respond.

The IRS’s full weekly tax filing data is scheduled to be released Friday in Washington.

Mnuchin has tried to explain early data and anecdotal evidence that refunds over the first weeks of the tax filing season are lower. Less wealthy people — whose taxes are less complicated and are more eager for a refund — tend to file the earliest tax returns.

The drop in the number and amount of refunds so far has irritated taxpayers and triggered new Democratic complaints about President Donald Trump’s new tax law.

Data for the seven days through Feb. 15 showed that direct-deposit refunds dropped for the third week in a row this filing season to $2,703, from $3,256 a year earlier. The total number of refunds was down 26.5 percent to 23.5 million, the IRS said last week.

— With assistance from Laura Davison

Treasury Department says fewer refunds better for U.S. taxpayers

By Laura Davison

Bloomberg News
February 14, 2019

The U.S. Treasury Department is defending the declining numbers of tax refunds being issued so far this year, saying that taxpayers already saw the benefits of the new tax law in their paychecks.

The number of tax refunds issued so far fell nearly 16 percent to 11.4 million, compared with 13.5 million at the same point in the tax filing season last year, according to Treasury data published on Thursday. The average amount of those refunds dropped to $1,949, compared with $2,135 in 2018.

“Most people are seeing the benefits of the tax cut in larger paychecks throughout the year, instead of tax refunds that are the result of people overpaying the government,” the Treasury said in a statement. “Smaller refunds mean that people are withholding appropriately based on their tax liability, which is positive news for taxpayers.”

The data, which reflects the first two weeks of the filing season, has been a sore point for some taxpayers who discovered that their refund is smaller than last year as a result of the late-2017 tax overhaul, which altered available deductions and credits and revised withholding tables.

In some cases, taxpayers who were counting on a refund found they owed the government instead.

The IRS has been off to a slow start this filing season after a 35-day government shutdown left the agency with a fraction of its staff just before the filing season launched Jan. 28.

Taxpayers, too, have been slower to file this year. The IRS has received about 7 percent fewer returns at this point in the filing season compared with a year ago.

The IRS is urging taxpayers who unexpectedly owe money to pay what they can if they can’t cover the whole liability at once. The agency has payment plan options for people in that situation. The IRS has also waived some penalties for those who didn’t have enough withheld out of their paycheck during the year.

Fear of filing? Some taxpayers finding tax bills, not refunds

Published February 11, 2019


Adam Oleson has enjoyed a tax refund every year for the past couple of decades. He normally counts on it to make an extra house payment, reduce student-loan debts or pay down the credit cards.

But this year, no such luck. Not only won’t Oleson get a refund, he said he owes the Internal Revenue Service $1,500.

A 40-year-old electrician, Oleson lives in Omaha, Nebraska, with his wife and three children. His is the kind of middle-class family that supporters of the 2017 tax overhaul said they were trying to help. But Oleson said the loss of deductions for union dues, tool purchases and continuing education costs have actually made him worse off.

He is one of an estimated 5 million taxpayers who used to rely on a refund every spring. But because of lower rates, the loss of some deductions and the addition of new tax breaks in the overhaul, those taxpayers are not seeing the refunds they’re used to.

But that doesn’t necessarily mean they didn’t benefit from the law. Some tax experts say the benefits are just coming in a different form, such as lower withholding, which translates into a bigger paycheck instead of one refund in the spring.

‘Wrong Metric”

“Most people don’t know how much they pay in taxes,” said Bob Kerr, who leads the National Association of Enrolled Agents, a trade group for tax preparers. “But the refund is the wrong metric to measure it.”

Right or wrong, the drop in expected refunds is creating fear and anger in accountants’ waiting rooms.

“Every single person” who walks in is dreading how much they’re going to owe the IRS, said CPA Gail Rosen, who heads the Martinsville, New Jersey, office of WilkinGuttenplan. “They come in and they worry.”

But telling people they paid fewer taxes throughout the year doesn’t help the sticker shock felt by filers who’ve become accustomed to getting a check, not writing one.

Only about 5 percent of taxpayers — about 7.8 million people — are expected to pay more under the new law. But about 5 million, according to the Government Accountability Office, will find their typical tax refund replaced by a tax liability.

“A lot of people are going to be surprised,” Rosen said.

Refunds Decline

The IRS estimates it will ultimately issue about 2.3 percent fewer tax refunds this year. In the first week of the filing season, the number issued fell about 24 percent, though much of that is likely tied to the government shutdown that left the IRS understaffed as it was preparing for filing season.

So far, the average refund is less than at the same point in 2018, averaging $1,865 compared with $2,035 last year, according to IRS statistics from the first week of the filing season. The Treasury Department downplayed its own data in a tweet Monday, saying the dip is based on a “small initial sample from only a few days.” A few minutes later, Treasury also tweeted a link to the IRS’s withholding calculator, encouraging taxpayers to look up how much they should be having taken out of their paychecks.

The confusion partly stems from the IRS changing the guidelines that helped employers determine how much to withhold from workers’ paychecks. The new withholding formulas put in place last year were more generous, but are a blunt instrument that doesn’t reflect the new law’s other changes, like the SALT cap as well as an end to the deduction of unreimbursed employee expenses such as home offices and union dues.

For the affluent taxpayers currently preoccupied with SALT limits, the new tax law also frees them from the alternative minimum tax, or AMT, and creates a much more generous credit for children under 17.

Big Surprise

Put it all together and the amount withheld from a paycheck in 2018 could be very different from what a taxpayer will owe the IRS by April 15.

The only way to have prevented a big surprise was to adjust withholding last year. Few people actually did that and it’s difficult without professional advice, because so many factors are at play.

“It’s a moving target,” said Arnold Berman, a CPA at ABD Associates in Valhalla, New York. “Your situation is going to be different from someone else with your income.”

The IRS is still encouraging people to check their withholding to make sure their refund expectations align with reality. Tax professionals also say withholding should be adjusted at major life events: marriage, the birth of a child, a significant raise or when changing how much of a salary is allocated to a retirement account.

Child Credit

Middle-class families with simple situations seem most likely to get pleasant news, thanks to the new $2,000 child tax credit. For more affluent taxpayers, their refund will depend on the complex interplay of lower rates, the easing of the AMT and new deduction limits.

The SALT cap has gotten the most attention from taxpayers in states like New York and California with high income and property taxes, but their angst will be offset by changes to the AMT, which prevented many of them from deducting their full state and local tax burden anyway.

The IRS is trying to soften the blow of all the refund confusion. This year, the IRS will waive the penalties for those who paid at least 85 percent of their tax liability, down from the usual 90 percent.

Taxpayers fearful of how much they owe are better off to file and not pay immediately than not to submit a return at all.

“The failure-to-file penalties are the worst,” said Harvey Bezozi, a CPA in Boca Raton, Florida.

Middle-Class Woes

The confusion is likely to do little to sway public opinion in favor of the new law. Republicans acknowledged in an internal poll before the 2018 midterms that they’d lost the messaging battle on tax cuts. The law has consistently struggled to poll above 50 percent approval.

Representative Peter King, a New York Republican who broke from his party and voted against the 2017 tax law, said he has already heard from constituents complaining that they’re paying more this year.

Getting to know the IRS payment plans

By Jim Buttonow

For the 2019 filing season, the IRS projects that more taxpayers than ever will file and owe. Many will be able to pay – but a lot of them will need to make other arrangements because they can’t pay their full tax bills to the IRS.

When taxpayers can’t pay their tax bills, they have a number of options, including payment plans, to pay off their outstanding taxes and accrued penalties and interest. Of the 16 million taxpayers who owe back taxes, 97 percent of them qualify to use a payment plan that’s fairly easy to set up and would likely give them the best payment terms.

The IRS has three simplified payment plans:

  • Guaranteed Installment Agreements (GIA): 36-month payment terms for balances of $10,000 or less.
  • Streamlined Installment Agreements (SLIA): 72-month payment terms for balances of $50,000 or less.
  • Streamlined Processing for Balances Between $50,000-$100,000: 84-month payment terms for balances between $50,000 and $100,000.

Advantages of 36-, 72-, and 84-month agreements

These are the three most common IRS payment plans. They’re all easy to obtain from the IRS, because they:

  • Require minimal, if any, financial disclosure to the IRS;
  • Don’t require an IRS manager to approve the payment terms;
  • Don’t require taxpayers to liquidate assets to pay the IRS; and,
  • Can be set up in one phone call or interaction with the IRS.

The GIA (36 months) and SLIA (72 months) can be completed online using the Online Payment Agreement tool at The GIA and SLIA are also attractive to taxpayers who don’t want a public record of their tax debt, because these agreements don’t require the IRS to file a public notice of federal tax lien. Taxpayers who owe between $25,000 and $50,000 must agree to pay by automated direct debit or payroll deductions to avoid a tax lien.

The “Streamlined Processing” 84-month payment plan works a little differently. The IRS started the 84-month plan as a pilot program in 2016 to make it easier for taxpayers who owe between $50,000 and $100,000 to get into a payment plan with the IRS. Taxpayers can avoid filing their financial information with the IRS if they agree to pay their tax bill by direct debit or payroll deductions. If they don’t agree to these automated payments, the IRS requires taxpayers to provide a Collection Information Statement (IRS Form 433-A or 433-F). Even with streamlined processing, the 84-month plan has one catch: The IRS will file a federal tax lien.

The pilot program for the 84-month plan is still in effect today. The IRS hasn’t completed its study on whether the 84-month plan is an effective collection option. One thing is clear about the program: It likely provides better payment terms and relieves burden for taxpayers.

The rules

GIAs are for taxpayers who owe the IRS $10,000 or less. As the name suggests, the payment plan is “guaranteed” if the taxpayer meets all conditions of the GIA:

  • It’s for individual income taxes only;
  • Total balances owed, including penalties and interest, must be $10,000 or less
  • The taxpayer must pay within 36 months;
  • All required tax returns have been filed; and,
  • The taxpayer has not entered into an installment agreement in the previous five years.

SLIAs can be used by individual taxpayers who meet these conditions:

  • It’s for income taxes and other assessments, including unpaid trust fund penalty assessments;
  • The total assessed balance is $50,000 or less (not including accruals of penalties and interest after the original assessment of tax, penalties, and interest);
  • The taxpayer must pay within 72 months; and,
  • All required tax returns have been filed.

Taxpayers can set a GIA or SLIA by:

  • Using the online payment agreement tool at;
  • Filing Form 9465 with the IRS; or,
  • Contacting the IRS by phone

Terms may be shorter for old tax debt

Taxpayers should be aware that they may not get the full length of time to pay their outstanding tax balances if their debt is old. For each of these simple payment plan options, the IRS will limit the terms if the collection statute of limitations (generally 10 years from the date that tax is assessed) is shorter than the prescribed payment terms.

For example, if a taxpayer’s collection statute expires in 24 months, any GIA, SLIA, or 84-month plan will be limited to 24 months. Taxpayers who can’t afford these payments may have to consider a payment plan based on their ability to pay.

Ability-to-pay installment agreements require taxpayers to file a Collection Information Statement and prove their average monthly income and necessary living expenses. In addition, the IRS often asks taxpayers to liquidate or borrow against their assets to pay their outstanding tax bill in ability-to-pay agreements.

Fees apply

There is a setup fee for all IRS installment agreements. The fees range from $225 for installment agreements set up by phone and paid by check, to $31 for agreements set up online and paid by automatic direct debit. Taxpayers who meet low-income thresholds can get the fee waived.

Tips for all three agreements

The GIA, SLIA, and 84-month payment plans are usually the best way to set up a payment plan with the IRS. They’re usually quick and easy to set up and likely provide taxpayers with better payment terms than most other options.

Taxpayers who can’t pay according to the GIA and SLIA terms face tax liens if they owe more than $10,000. Taxpayers also need to request the GIA or SLIA before the IRS files a tax lien. After the lien is filed, taxpayers must pay their full balance to get the lien released, or pay down the balance to $25,000 to start lien-withdrawal proceedings.

Here are a few other tips related to these simple agreements:
1. Avoid a tax lien – pay down the balance to get into a SLIA. Here’s the best plan for taxpayers who owe more than $50,000: Get an extension to pay of up to 120 days, get funds to pay the balance down to under $50,000, and obtain a SLIA. Doing so will avoid the filing of a tax lien.
2. For SLIA, it’s the “assessed” balance – not the total amount owed. The $50,000 SLIA threshold is based on the taxpayer’s assessed balance – not the total amount they owe. The assessed balance includes tax, assessed penalties and interest, and all other assessments for each tax year. It doesn’t include accrued penalties and interest after the original assessment. For example, if a taxpayer’s original assessment is under $50,000 for an older tax year, he may accrue additional penalties and interest that puts the total balance over $50,000. In this situation, they would still qualify for a SLIA based on the original assessed balance. Taxpayers can also designate payments to reduce their “assessed balance only” to help them qualify for a SLIA.
3. Apply and pay automatically to reduce fees. The IRS increases installment agreement setup fees if taxpayers pay by check. Reduce the setup fee by agreeing to automatic direct debit payments. Automatic payments also avoid a monthly reminder letter from the IRS about the payment due.
4. Pay by direct debit or payroll deduction to avoid default. IRS installment agreements have a high default rate. To avoid a default, taxpayers must make their monthly payments. The best way to avoid missing a payment is to have the payment automatically deducted from the taxpayer’s financial accounts.
5. Don’t owe again. The second most common cause of defaulted installment agreements is filing future tax returns with unpaid balances. Taxpayers need to change their withholding and/or make estimated tax payments to avoid owing taxes that they can’t pay in the future.
6. Taxpayers can miss one payment a year. Most IRS payment plans allow taxpayers to miss one payment per year and not default. It’s best for the taxpayer to notify the IRS in advance if they can’t make a payment.
7. If the taxpayer’s financial situation worsens, get an ability-to-pay plan. Taxpayers can always renegotiate their payment plans if their financial circumstances change. For example, if a taxpayer loses their job, they may not be able to pay the IRS. In these cases, the taxpayer can contact the IRS and provide documentation on their ability to pay. This may mean a lower payment or even payment deferral (called currently not collectible status). Be careful here: If the taxpayer owes more than $10,000 and can’t pay within 72 months, the IRS is likely to file a tax lien.
8. Remember to ask for penalty abatement at the end of the plan. One important action to take at the end of a payment plan is to request abatement of the failure to pay penalty. Taxpayers should consider using first-time abatement or reasonable cause abatement if they qualify.

Each year, more than 3 million taxpayers get into a payment plan with the IRS. With tax reform, we can expect that more taxpayers will need a payment plan in 2019. Taxpayers who owe less than $100,000 should first look at 36-, 72-, or 84-month payment plans with the IRS. Many will also benefit from the help of a qualified tax professional to find the best option.

CPA, Taxes, Bookkeeping, Payroll, Accounting Services