The 2017 tax reform legislation made changes to the income tax brackets, limited or suspended various itemized deductions and suspended the personal and dependency exemptions from 2018-2025.
Because of these substantial changes, the IRS and Treasury Department developed new withholding tables to help employers estimate how much income tax to withhold from employee paychecks. In some cases, the new withholding tables resulted in situations where insufficient income taxes were withheld throughout the year, so some taxpayers are now finding that they underpaid for 2018 and will owe the IRS additional taxes in addition to the generally applicable underpayment penalty. The IRS has announced that it is providing penalty relief to certain taxpayers who underpaid during the 2018 tax year.
We asked Professors Robert Bloink and William Byrnes, who write for ALM’s Tax Facts and hold opposing political views, to share their opinions about this underpayment relief, and whether it would be sufficient to help taxpayers who underpaid because of tax reform in 2018.
Below is a summary of the debate that ensued between the two professors:
Byrnes: The underpayment relief provided by the IRS and Treasury should be more than sufficient to help those taxpayers who underpaid their tax liability in 2018 because of the new tax law changes. So long as these taxpayers paid at least 85 percent of their tax liability, as opposed to 90 percent of tax liability, throughout the year, they will not be subject to any penalties at all.
Bloink: All underpayment penalties should be waived for taxpayers who underpaid their tax liability throughout the year in reliance on withholding tables developed by the IRS and Treasury. The current penalty relief does not go far enough. We’re talking about an income tax system that was entirely revamped beginning last year, so that taxpayers couldn’t even rely upon the usual methods for determining tax liability during the year. If the underpayment wasn’t the taxpayer’s fault, which is the case in the vast majority of cases this year, the taxpayer should not be penalized.
Byrnes: I agree with Professor Bloink, which is why the IRS has provided this penalty waiver relief. Only those taxpayers who underpaid because of justifiable confusion with the new tax code should be exempt from penalty. I think that if you seriously underpaid in your taxes for 2018, that confusion likely was not justified, so it makes sense to continue to impose a penalty for those taxpayers.
Bloink: The 85 percent mark is arbitrary. This is something like 30 million taxpayers who will unexpectedly owe the IRS additional taxes for 2018 because of the new withholding tables—not just a few taxpayers who weren’t paying attention or deliberately underpaid. Taxpayers who relied upon the new withholding tables to calculate their 2018 tax liability should not be subject to penalty for relying on the tables that the government provided.
Byrnes: Everyone just got a huge tax break this year and yes, the law was changed, but taxpayers are still responsible for paying their taxes and there has to be some kind of penalty for those who do not pay on time. Waiving all penalties for the year is like a get out of jail free card for those taxpayers who didn’t responsibly calculate and pay their taxes.
Bloink: Professor Byrnes is missing the point here. Sure, some taxpayers will owe less in 2018, but others will end up owing more than expected, primarily because of the changes to the tax code designed to generate revenue to offset the massive corporate tax break that this tax law has created (for example, the SALT cap). Now, the IRS and Treasury have provided new withholding tables used to calculate those taxes, and in many cases, those withholding tables led people to pay too little throughout the year. So we’re now saying that the very entities that developed the withholding tables get to also collect a penalty from taxpayers who underpaid…. because of the withholding tables? That’s unfair if I’ve ever seen unfair.
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