Employees Beware: Your Income Tax Refund May Not Be What You Expect This Year
By: Ashley Swan and Brian Gardner
After several revisions and months of debate, Congress enacted The Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017, the largest change to the Internal Revenue Code since 1986. The sweeping changes resulted in more take-home pay for some employees, but many employees will find that they did not have enough Federal income tax withheld from their paychecks to cover their entire tax liability for 2018. Employees that routinely get refunds may actually owe tax when they file their return this tax season.
The TCJA doubled the standard deduction, eliminated personal exemptions, and revised or eliminated many itemized deductions beginning January 1, 2018. The TCJA also changed the individual income tax rates reducing the top marginal rate from 39.6% to 37%. Taxpayers were still waiting on guidance on a number of items, such as the $10,000 limitation on the deduction for state and local property and income tax or sales tax, for most of 2018. This made it nearly impossible for tax advisors to provide accurate tax computations for their clients during the year.
The TCJA came together quickly and there were several last-minute revisions, so the IRS had little time to update the income tax withholding tables to provide instructions for employers and payroll companies on the amount of Federal income tax to withhold each pay period. The IRS released the updated withholding tables in time for employers to start using them by February 15, 2018. Employees may have noticed their larger take-home pay starting in February or March of 2018. The IRS also revised the Form W-4, Employee’s Withholding Allowance Certificate, in February of 2018 and again in January of 2019. They have already announced the release of a more accurate Form W-4 for 2020.
While the IRS asked taxpayers to use its withholding calculator and update their Form W-4 accordingly, most employees did not check to ensure that their withholdings were correct. The Government Accountability Office (“GAO”) projects that up to 21% or approximately 30 Million taxpayers were being under withheld and will owe tax on April 15th instead of getting a refund when they file, based on a new report filed by the GAO in July of 2018. The taxpayers most at-risk to owe additional tax this season are joint filers with more than $200,000 of adjusted gross income and single filers with adjusted gross income in excess of $175,000.
Penalties and Penalty Abatement
Taxpayers who failed to withhold (or make estimated tax payments) of at least 90% of their total tax owed typically face penalties for failure to make estimated tax payments. The IRS has already released guidance indicating that it will waive the estimated tax penalty for taxpayers during this filing season who withheld at least 85% of their tax for the 2018 tax year.
In addition to penalties for failing to make estimated tax payments, taxpayers unable to pay their entire liability by April 15, 2019, will face failure to pay penalties. The failure to pay penalty is 0.5% of the additional tax owed for every month the tax remains unpaid up to a maximum of 25% of the tax. Even taxpayers who cannot pay the tax should file timely, as the failure to file penalty is much higher at 5% of the additional tax owed for every month their return is late.
Penalty abatement is available in various situations. These include First Time Penalty Abatement and Penalty Abatement based on Reasonable Cause. First Time Penalty Abatement can only be used once. Penalty Abatement based on Reasonable Cause is used when a taxpayer intended to meet all filing requirements but due to no fault of their own failed to meet filing requirements. Situations include natural disaster, oversight from CPA, or serious illness during the tax year. Taxpayers facing penalties should contact their tax advisor to determine whether they could qualify for abatement of some or all of their penalties.
What Do You Do if You Owe Tax This April?
The simple answer is to pay any tax due and owing by April 15, 2019. However, the IRS provides several collection alternatives for taxpayers who cannot afford to pay their entire tax liability by April 15th. The primary collection alternatives are Installment Agreements and Offers in Compromise, and taxpayers who cannot afford to make any payments may qualify to be placed in Currently Not Collectible status. Each of these collection alternatives requires the taxpayer to timely file and pay any tax owed in the ensuing tax years. Taxpayers currently enrolled in one of these programs should contact their tax advisor immediately if they will owe additional tax this year, as this will likely cause them to default on their current payment arrangement.
An installment agreement allows a taxpayer to pay their tax liability over a monthly payment schedule. There are three types of installment agreements offered by the IRS: guaranteed installment agreements, streamlined installment agreements and non-streamlined installment agreements/partial pay installment agreements. Guaranteed installment agreements are for taxpayers with a tax liability under $10,000 that can be paid within 36 months. Streamlined installment agreements are for taxpayers with a tax liability under $50,000 that can be paid within 72 months. Non-streamlined installment agreements are for taxpayers who owe over $50,000 and can make monthly payments. For a non-streamlined installment agreement, the IRS typically requires that the taxpayer fill out Form 433-F (Collection Information Statement) to determine what the taxpayer can pay on a month-to-month basis. Among other things, the IRS will review average monthly income, average monthly expenses, and the taxpayer’s equity in assets.
Currently Not Collectible Status
Currently Not Collectible (CNC) status is available for taxpayers who, based on their income and expenses, cannot currently afford to pay any amount to the IRS. CNC status puts the taxpayer’s account on hold and no collection action will be taken against the taxpayer, including lien or levies, during that time. The taxpayer can stay in CNC until there is a change in their financial status. The IRS will typically request updated financial information from the taxpayer within a year of being considered “Currently Not Collectible” to determine if there has been a significant change in the taxpayer’s financial status.
Offers in Compromise
This collection alternative is for taxpayers who cannot pay their full tax liability and can offer an amount to the IRS to settle for less than the total amount that is owed. The IRS evaluates the taxpayer’s ability to pay by reviewing their income, expenses, assets, and future ability to pay. Situations where an Offer in Compromise is appropriate is when a taxpayer has no assets, fluctuating income, reaching retirement age, and paying their full tax liability would cause an economic hardship. Similarly, a taxpayer suffering from an illness, unable to work full-time, and with an increase in medical bills would be a good candidate for an Offer in Compromise since paying their full tax liability would cause an economic hardship.
Conclusion and Recommendations
Taxpayers who owe tax this year should work with their tax advisor to adjust their income tax withholding for 2019, to avoid being in the same position next year. If you are faced with an unexpected tax liability this tax year, penalty abatement (if applicable) and a suitable collection alternative should be considered. If you have any questions please feel free to reach out to Ashley Swan by calling her at 404-640-5947 or emailing her at email@example.com.
Disclaimer – The information in this law alert is for informational purposes only and does not constitute legal advice. No attorney-client relationship has been or will be formed by any communication(s) to, from or with the law alert or author. The opinions expressed are those of the author, and decisions relating to the content belong to the author.
 I.R.C. §6654.
 I.R.C. § 6651(a)(2).
 I.R.C. § 6651(a)(1).
 I.R.M. 22.214.171.124
 I.R.M. 126.96.36.199.9
 I.R.M. 188.8.131.52.2