Why Are Some Americans Who Underpaid Taxes Getting a Reprieve?

By Alan Olsen
Why Are Some Americans Who Underpaid Taxes Getting a Reprieve?

The IRS has a reputation of being somewhat of a stickler when people underpay on their taxes, and with good reason. The agency has earned that reputation over the years, going after what seems like every last penny taxpayers owe. In fact, the IRS even holds people responsible who unintentionally make mistakes on their taxes. Honest mistakes are still mistakes and the tax bill still has to be paid, often with penalties. So the recent report that the IRS is going to forgive some taxpayers that underpaid their2018 tax liabilities might come as a surprise to many.

IRS to Waive Tax Penalties

First off, these individuals still have to pay off their tax debt. But they won’t have to pay any tax penalties because the IRS is going to waive them. And not everyone gets this reprieve. These were no ordinary circumstances. “The waiver applies to taxpayers whose total withholding and estimated tax payments are at least 85 percent of the taxes they owe,” according to the IRS. So why is the IRS being so generous to these taxpayers? Because it’s more likely that calculations were incorrect because of the Tax Cut and Jobs Act.

Withholding Amounts Are the Key

According to a statement from the U.S. Department of Treasury’s Office of Public Affairs,“The lower rates in the Tax Cuts and Jobs Act(TCJA)reduced the amount taxpayers needed to withhold in their paychecks ... Should they have marginally miscalculated their 2018 withholdings, this waiver ensures they will not face the standard penalty for underpaying their taxes.” During any given year, people can actually avoid a tax penalty for underpaying,as long as they paid withholding and at least 90 percent of the amount they owed in estimated taxes. Thisyear’s slight adjustment to the percentage is intended to help those who may havemiscalculated, due to the TCJA.

Did Taxpayers Heed the Warnings?

Despite repeated warnings from the IRS throughout the year, many taxpayers failed to adjust their W-4 withholding amount. Part of the problem was that the old method of calculating didn’tworkfor the new tax law. The TCJA gave the Treasury Department the authority to create a new withholding allowance structure. However, the department did not have enough time to create and issues a new W-4.

Most People Get Their Withholdings Wrong

That was bad news. The Government Accountability Office performed a simulation and found that an estimated 21 percent of taxpayers were likely going to under-withhold theirpayroll taxes. That equals threemillionmore people than normal under the old tax law.That’s a lot of people that would end up with a tax bill instead of a refund. And for the most part, all of these people would be very surprised. It’s very common for taxpayers to withhold the wrong amount. In fact, only 6 percent of all taxpayers get their withholding amount right. On the other hand, 73 percent are more likely to over-withhold. All of these taxpayers would then be in line for a refund when they file their tax returns.

Check Your Withholdings for 2019

While you can’t change what happened last year, it’s a good idea for all taxpayers to check their withholdings rate for the coming year. This will help you avoid the same problem next tax season.