The IRS is giving a break to people who owed too much money when they filed their income returns in the first year a tax-code overhaul took effect.
The agency said Wednesday it wouldn’t impose a tax penalty on more than 400,000 taxpayers who didn’t seek the penalty waiver when they filed.
People who haven’t paid at least 90% of their federal tax bill come tax season can be penalized for paying too little up to that point.
The Tax Cuts and Jobs Act of 2017 set up new tax withholding tables, but many consumers never updated how much the feds would take out of their paycheck. Without the adjustment, many were paying too little and facing the possibility of a penalty on top of their tax bill.
The IRS lowered the penalty threshold to 85% in January and reduced it to 80% in March, recognizing many taxpayers were making a rough transition to the new tax rules. The 90% penalty threshold is back in effect for the coming year, the IRS noted.
The waiver on the underpayment penalty will be applied automatically, so taxpayers don’t have to contact the IRS to request the relief. The IRS will send notices to eligible taxpayers and reimburse people who already paid the penalty.
IRS Commissioner Chuck Rettig said the waiver announced Wednesday “is designed to provide relief to any person who filed too early to take advantage of the waiver or was unaware of it when they filed.”
The new tax code lowered tax bills as whole. Overall liability for individual taxpayers was $1.048 trillion this year, compared to $1.113 trillion one year earlier, according to IRS data released last month.
Nevertheless, out-of-date withholdings could have caused many taxpayers to flip from refunds in 2017 to tax bills in 2018. Unadjusted withholdings also caused many people to receive underwhelming refunds, experts said.
In December, the tax-preparation company H&R Block HRB, +0.52% said 19% of survey participants updated their paycheck withholding after the new law took effect.
The average 2019 refund was $2,729, while the average 2018 refund was $2,778, according to IRS statistics from May.