Why Are Some Americans Who Underpaid Taxes Getting a Reprieve?

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 to withhold and at least 90 percent of the amount they owed in estimated taxes. This year’s slight adjustment to the percentage is intended to help those who may have miscalculated, 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’t work for 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 their payroll taxes. That equals three million more 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.

We hope you found this article about “Why Are Some Americans Who Underpaid Taxes Getting a Reprieve?” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

To receive our free newsletter, contact us here.

Subscribe to our YouTube Channel for more updates.

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

Alan L. Olsen, CPA, Wikipedia Bio

GROCO.com is a proud sponsor of The American Dreams Show.

The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.