Tax Reform Not Responsible for 2018 Withholding Errors, Senior Treasury Official Says

A senior Treasury official has said that tax reform is not responsible for taxpayers’ withholding errors in 2018. Senate Democrats have criticized the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) and the Trump administration for the anticipated increase in taxpayers who under-withheld during the 2018 tax year.

“Let’s call it what it is, this is tax penalty entrapment,” Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., said in a February 26 press release. Wyden and 39 other Senate Democrats asked Treasury and the IRS earlier this month to waive taxpayers’ underpayment penalties associated with implementation of the TCJA.

Underpayment Penalties

The IRS announced in IR-2019-03 that it would waive the underpayment penalty for taxpayers who paid at least 85 percent of their total tax liability during the 2018 tax year. The usual threshold is 90 percent.

Additionally, several Republican lawmakers and tax practitioners have encouraged the IRS to further lower the 85 percent income threshold the IRS is using this filing season for the assessment of underpayment penalties. However, a senior Treasury official told Senate Democrats in a letter this week that “tens of millions” of taxpayers are under-withheld every year, regardless of the TCJA’s implementation.

“The TCJA, and our implementation of the law through the withholding tables and Form W-4 instructions, will not cause tens of millions of taxpayers to be under-withheld,” J. Brady Howell, senior advisor within Treasury’s Office of Legislative Affairs, wrote in a February 25 letter to Senate Democrats. “Rather, tens of millions of taxpayers are under-withheld every year, due to taxpayers’ choices or the difficulties some taxpayers face in adjusting withholding to account for changes in their circumstance each year,” Howell added.

Moreover, the lowered 85 percent threshold the IRS intends to use for underpayment penalties this filing season “will provide substantial relief to many taxpayers without creating large windfalls” for taxpayers would have under-withheld regardless of the TCJA, Howell noted. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to a recent report by the nonpartisan Government Accountability Office (GAO).

By Jessica Jeane, Senior News Editor

A copy of the February 25 Treasury letter to Senate Democrats can be located here.

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