This post updates Worldwide ERC®’s January 15 report on the effect of the current government shutdown on the 2018 tax filing season.
On the afternoon of January 15, the IRS released an updated contingency plan under which an additional 35,000 IRS employees will be recalled. See the full plan. It also said it would waive underpayment penalties for some taxpayers who are under-withheld due to confusion as to the effect of the 2018 tax changes.
The new contingency plan calls for some 46,000 IRS employees to resume their duties, most of them involved in the processing of tax returns and refunds. Previous plans had called for just under 10,000 such employees. All will work without pay during the government shutdown but will eventually be paid once the shutdown ends. Some of the recalled employees also will assist with such activities as criminal investigations, information technology, collection, and other IRS programs. They will not be initiating new investigations or cases, however, only assuring that existing matters are not compromised by delays due to the shutdown. Some 57.4% of the total IRS workforce of about 80,000 will be working.
This is welcome news for taxpayers, who will have more assurance that tax filing processes will proceed on a timely basis. In addition to filing and processing activities, IRS call sites will be staffed to answer taxpayer questions, but only those relating to the new tax law.
Responding to numerous questions about the applicability of penalties, the IRS on January 16, 2018, said it would waive some underpayment penalties. See IR-2019-3.
Under the Internal Revenue Code, a taxpayer generally is subject to penalty if withholding and estimated tax payments do not total at least 90% of tax liability shown on the tax return, or 100% of taxes paid the prior year (110% if Adjusted Gross Income was over $150,000).
However, because withholding tables were adjusted early in 2018 to account for lower tax rates and a higher standard deduction, but not for other changes such as the loss of dependency exemptions and the loss or limitation of other deductions, the IRS and practitioners have been concerned that some taxpayers who did not adjust their withholding will unexpectedly be under-withheld and owe taxes when their returns are filed.
Accordingly, IRS says it will waive penalties for anyone who paid, through withholding or estimated taxes, at least 85% of their liability, reducing the 90% requirement. This is expected to considerably reduce the incidence of underpayment penalties (although, unfortunately, not the pain of unexpectedly owing tax rather than receiving a refund).
Transferees are among those who may have been under-withheld, due to loss of the moving expense deduction and loss or limitation of other common deductions, particularly the limitation of the deduction for state and local taxes to $10,000. Penalty relief will be important to those who owe taxes and will reduce the number of issues they raise with their employers. The availability of IRS staff to answer questions will be helpful to transferees and their employers, as well as the likelihood that tax filing processes will proceed normally.