Tax Strategy: Handling underpayment of estimated tax penalties

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The Internal Revenue Service has now come out with three pieces of guidance on the handling of underpayment of estimated tax penalties on 2018 tax returns, each new piece of guidance progressively more helpful to taxpayers. The first guidance, Information Release 2019-03, issued Jan. 16, 2019, before the beginning of tax filing season, lowered the usual threshold for avoiding the underpayment penalty from 90 percent to 85 percent of the 2018 tax liability.

The second guidance, Information Release 2019-55, issued March 22, 2019, after many tax returns would have been filed, further lowered the threshold from 85 percent to 80 percent and provided that those who had already filed returns and paid too much penalty could file a claim for refund on Form 843.

The most recent guidance, Information Release 2019-144, issued Aug. 14, 2019, eliminated the requirement to file a claim for refund to obtain the return of an excess penalty paid for an estimated 400,000 taxpayers who had already filed their 2018 tax return but did not claim the waiver. The IRS said that it would, on its own initiative, review those returns and issue a CP21 notice to taxpayers regardless of whether they had requested relief, with a refund check to follow approximately three weeks thereafter. The 400,000 number appears to include any taxpayers who failed to claim the waiver on their 2018 tax returns, not just those taxpayers who had filed before the guidance was amended from 85 percent to 80 percent on March 22. Taxpayers on extension who have yet to file their tax returns were requested to claim the waiver by filing a Form 2210, either electronically as part of a tax software package or on paper.

So what should taxpayers and return preparers do at this point?

For 2018 returns already filed

Taxpayers who have already filed a 2018 tax return and claimed the waiver based on the 80 percent threshold should still be OK and not be required to take any further action or expect any response from the IRS unless a review of the return detects what the IRS believes to be an error in the waiver calculation.

Taxpayers who have already filed a 2018 tax return and who did not claim the waiver or claimed it based on the 85 percent threshold rather than the 80 percent threshold can await the IRS review of their return without further communication with the IRS and await receipt of the CP21 from the IRS. These taxpayers and return preparers should do their own calculation of the anticipated refund due to compare to the CP21 calculation. Any difference may still need to result in filing a claim for refund. The IRS indicated that the CP21s should be issued over the next few months, so it is not certain at this point how long taxpayers and their preparers should wait for a CP21 before making inquiry. After the CP21 is issued, the refund check was promised within about three weeks, so a failure to receive the refund within that time frame might also warrant an inquiry as to its status.

If these taxpayers had already filed a claim for refund based on the March 22 revision to the threshold, it is not completely clear if the IRS will process the claim for refund or include those taxpayers in its automatic CP21 review. Either way, however, the taxpayer should receive an IRS response to the claim for refund or in the CP21 review.

For 2018 returns on extension

Taxpayers and their return preparers still working on filing a 2018 tax return are requested to claim the waiver by filing Form 2210. The instructions for Form 2210, which run for 27 pages, include a worksheet for calculating any penalty that may be due after taking into account the waiver. It is important to remember that the IRS waiver also includes a waiver of the normal annualization rules for calculating the penalty. Therefore, any estimated tax payments for 2018 made by Jan. 15, 2019, count the same regardless of when they were made during the year. This could be a significant benefit to taxpayers who made larger estimated tax payments in the latter part of the year than in the earlier part of the year. It also benefits taxpayers whether or not the underpayments were due to issues and confusion from the Tax Cuts and Jobs Act. It also eliminates the requirement to do the complex annualization schedule on Form 2210, unless the taxpayer is still under the 80 percent threshold and might benefit from annualization.

It is not immediately clear what happens if a taxpayer still files a tax return after the August 14 guidance from the IRS and fails to claim the waiver. It may be that the IRS will add those returns to those for which it will take the initiative and do a CP21 review without a request for refund from the taxpayer, but we may need some clarification from the IRS on how those returns will be handled.


The guidance from the IRS on waivers of the underpayment of the estimated tax penalty is good news for taxpayers, whether they underpaid estimated taxes as a result of confusion from the Tax Cuts and Jobs Act or whether they failed to pay sufficient estimated taxes for other reasons. Even where the IRS indicates that it will take the initiative without taxpayer request to determine the proper estimated tax penalty, it would be advisable for return preparers to do their own calculation to determine whether a refund is due and the amount of the refund, to verify the CP21 calculation from the IRS.

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