Broker Check

IRS Reduces Underpayment Penalty Threshold

February 07, 2019

The IRS recently announced that it will reduce the underpayment penalty threshold from 90% of the tax owed to 85%. Historically, taxpayers who paid in at least 90% of their total tax liability during the year would not be subject to a tax under-payment penalty. However, given concerns about the tax law changes and the changes to the tax withholding tables which reduced the amount that many taxpayers have withheld from their paychecks, the IRS has taken a more lax approach to assessing the penalties for the 2018 tax year.

Tax underpayment penalties are designed to discourage taxpayers from waiting until tax season to pay the tax that they owe for the year. In essence, the penalty is actually a calculation based on market interest rates in which the taxpayer is charged interest on the amount that they should have paid to the government during the year but instead delayed until tax season.

While this is a welcome change to IRS policy it is unlikely to be extended to 2019. Therefore, taxpayers who find that they owe more than 10% of their 2018 tax liability when they file their return this year should look into adjusting their tax withholding elections to reduce the amount owed. Otherwise a penalty may be assessed next year.