Lawmakers ask for more relief from underwithholding penalties

Tax refunds have emerged as the latest flashpoint in Congress as lawmakers ask the IRS to give taxpayers some relief from the threat of tax penalties if they didn't withhold enough money from their paychecks last year.

Reports began emerging after tax season opened in late January from early filers that many of them either owed more money than they expected to the Internal Revenue Service or were receiving smaller tax refunds than last year, thanks to the Tax Cuts and Jobs Act. Early statistics from the first few days of tax season released by the IRS indicated the average refund amount declined from $2,035 to $1,865, an 8.4 percent drop (see IRS reports decline in refunds and filings during first week of tax season).

The Tax Cuts and Jobs Act eliminated or sharply limited a host of traditional tax deductions while reducing marginal tax rates. Many of the problems were attributed to changes in the withholding rules, as the new tax law also got rid of dependent and personal exemptions in exchange for doubling the standard deduction and the Child Tax Credit. The IRS urged taxpayers to check its online withholding calculator and adjust their withholdings, but the calculator was complicated to use and its recommendations were only a guess.

Sign in front of IRS building in Washington, D.C.
The IRS building in Washington, D.C.

The IRS agreed to provide some relief from underwithholding and underpayment penalties, waiving the tax penalty for taxpayers who paid at least 85 percent of their total tax liability last year via federal income tax withholding, quarterly estimated payments or a combination of the two. But some Democrats in Congress, as well as the American Institute of CPAs, are urging it to go further (see AICPA wants more penalty relief for underpayments and late payments by taxpayers and AICPA CEO Melanson wants IRS to reduce tax underwithholding penalties).

House Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga., and Oversight Subcommittee member Judy Chu, D-Calif., sent a letter Tuesday to Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Rettig, asking for additional relief for taxpayers who unintentionally underwithheld. They requested that the threshold for relief from the IRS underpayment penalty be lowered to include taxpayers who paid at least 80 percent of their 2018 tax liability.

In their letter, Lewis and Chu pointed out that the IRS and the Treasury prepared new federal tax withholding tables last year following the enactment of the Tax Cuts and Jobs Act.

“As you know, when Treasury and the IRS released these tax withholding tables in 2018, the tables did not fully factor in the TCJA’s reduction in itemized deductions and the TCJA’s removal of personal exemptions,” they wrote. “As a result, taxpayers likely had less tax withheld in 2018 than in the prior year.”

They cited a report last July from the Government Accountability Office estimating “that 21 percent of taxpayers (nearly 30 million Americans) will owe more taxes in 2019 due to underwithholding,” as a result of the new withholding tables.

Along with asking for relief for more taxpayers who unintentionally underwithheld, Lewis and Chu also want “to know what adjustments Treasury and the IRS made to incorporate the TCJA into the withholding calculations for 2019 and what additional guidance Treasury and the IRS plan to issue to address underpayments and lower-than-expected refunds.”

“We do not want taxpayers to be in the same situation again next year,” they added.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, defended the new tax law and insisted that reports of the lost tax refunds were overblown. “Immediately, naysayers began focusing on data that suggests tax refunds in the first week were down slightly over last year, as well as focusing on anecdotal social media posts,” he said on the Senate floor Wednesday. “Never mind that the current refund numbers are based on only a few days of data or that refund statistics can vary widely from one week to the next.”

He blamed the media for focusing on unverified Twitter posts and contended that most taxpayers would be getting tax cuts. “You most assuredly wouldn’t know this from the headlines bemoaning a reduction in tax refunds, but the vast majority of taxpayers experienced a tax cut last year – and will this year too,” he said. “Every analysis, from the nonpartisan Joint Committee on Taxation, to the right-leaning Tax Foundation, to the liberal Tax Policy Center, demonstrates that taxpayers are sending less of their hard-earned money to Washington this year.”

For its part, the IRS assured taxpayers Wednesday that even if they end up owing money this year, there are payment options available such as installment agreements and online payment agreements. The agency noted that while most taxpayers will get a tax refund, others may find that they owe taxes, but many of them may qualify for a waiver of the estimated tax penalty that normally applies. They should consult Form 2210, "Underpayment of Estimated Tax by Individuals, Estates and Trusts," and its instructions for details. The IRS is also again encouraging taxpayers to check the online withholding calculator to make sure they don’t face the same problem next year.

“The IRS understands there were many changes that affected people last year, and the new penalty waiver will help taxpayers who inadvertently had too little tax withheld,” said Rettig in a statement. “We encourage people to check their withholding again this year to make sure they have the right amount of tax withheld for 2019.”

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