Treasury noncommittal on waiving tax penalties for under-withholding any further

The Treasury Department so far isn’t agreeing with requests from congressional Democrats and the American Institute of CPAs to go further in eliminating tax penalties for taxpayers who didn’t withhold enough taxes last year after passage of the Tax Cuts and Jobs Act.

Last month, the IRS announced that it would generally waive the tax penalty for any taxpayer who paid at least 85 percent of their total tax liability last year through federal income tax withholding, quarterly estimated tax payments or a combination of the two (see IRS to waive tax penalties for underwithholding and underpayment). The usual percentage threshold for avoiding a penalty is 90 percent. However, once tax season got underway at the end of January, many early filers complained about lower tax refunds or unexpectedly high tax bills, largely due to the extensive changes in the Tax Cuts and Jobs Act, and failure to adjust withholdings last year.

The ranking Democrat on the Senate Finance Committee, Sen. Ron Wyden, D-Ore., along with Senate Minority Leader Chuck Schumer, D-N.Y., and their Senate Democratic colleagues sent a letter to Treasury Secretary Steven Mnuchin earlier this month asking for the Treasury Department to waive tax penalties for taxpayers who did not attempt to manipulate the system.

Treasury Department building
The United States Treasury Department building in Washington, D.C.

The American Institute of CPAs also suggested the IRS waive penalties for taxpayers who had paid 80 percent of what they owed in 2018 or 2017 instead of 85 percent (see AICPA wants more penalty relief for underpayments and late payments by taxpayers).

The Treasury Department sent a response Monday from J. Brady Howell, a senior advisor in the Treasury’s Office of Legislative Affairs, taking issue with Democrats’ characterization of the tax policies that led up to the problems.

“The TCJA, and our implementation of the law through the withholding tables and Form W-4 instructions, will not cause tens of millions of taxpayers to be under-withheld,” he wrote to Wyden and the other Senate Democrats. “Rather, tens of millions of taxpayers are under-withheld every year, due to taxpayers’ choices or the difficulties some taxpayers face in adjusting withholding to account for changes in their circumstances each year. Recognizing that because the TCJA is new and some taxpayers will not have understood that they should have checked their withholding despite the extensive outreach efforts, IRS recently announced that taxpayers would not be subject to the usual underpayment penalties as long as they timely paid at least 85 percent of the tax they owe. This will provide substantial relief to many taxpayers without creating large windfalls for taxpayers who would have been under-withheld in any event.”

Wyden had accused the Trump administration of hastily redoing the tax withholding tables last year ahead of the midterm election, harming taxpayers and causing them to owe taxes this year, saying they would have to “pay back the phantom windfall to the IRS” (see Senate Democrats accuse Treasury of manipulating withholding tables to produce ‘phantom windfall).

Howell denied Wyden’s accusation. “There was absolutely no manipulation of the tables and no ‘phantom windfall’ in taxpayers’ paychecks,” he wrote.

However, he did not say whether the Treasury would take any further steps to protect Americans from penalties for underpayment.

Wyden refused to let up on pressure on the Treasury to waive the tax penalties. “Let’s call it what it is, this is tax penalty entrapment,” Wyden said in a statement Tuesday. “First the Trump administration chose to under-withhold taxes from millions more Americans than is typical, and now the administration could sock a whole lot of unsuspecting people with penalty fees for underpayment. This same Trump tax law that handed hundreds of billions of dollars to corporations and billionaires is now a source of enormous financial anxiety for America’s middle class, and still the Trump administration expects them to be grateful. There is no good reason to inflict these fees on people who didn’t game the system. It shouldn’t surprise anybody, but they just don’t get it.”

Wyden’s Republican counterpart, Senate Finance Committee chairman Charles Grassley, R-Iowa, dismissed the complaints about lower tax refunds so far this tax season as overblown. “Forget about the fact that the size of one’s tax refund tells you absolutely nothing about a taxpayer’s overall tax burden,” he said Wednesday. “I have been amazed by how many of my colleagues on the other side of the aisle — who should know better — have sought to equate incomplete information about lower average refunds with higher taxes.”

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