Surprised to owe taxes this year? The new tax laws that went into effect with the 2018 tax returns have caught more than a few North Carolina residents off guard. For many people, this will be the first time in a long time (or ever) owing the IRS and/or the North Carolina Department of Revenue (NCDOR). To add insult to injury, the IRS and NCDOR typically impose an underpayment penalty if not enough taxes were paid in throughout the year which increases the overall amount owed. Fortunately, on March 22, 2019, the IRS decided to grant taxpayers additional tax relief to reduce and/or eliminate the underpayment penalty imposed on 2018 tax returns. Below is information about underpayment penalties, how to avoid them, and how to get a refund of an underpayment penalty paid.
What is an Underpayment Penalty?
Starting with the basics, a tax return simply serves to reconcile the amount of tax you owe according to tax laws with the amount of taxes you have paid in throughout the year. For employees, Federal and North Carolina income taxes are withheld from each paycheck and remitted by their employers on their behalf. For self-employed people, taxes are self-remitted through paying in taxes on a quarterly basis directly to the IRS and the NCDOR. Uncle Sam and his cousin, NCDOR, want to collect their money from taxpayers year-round and not just every April when most individual income tax returns are due. As such, they impose underpayment penalties on people who don’t pay in enough throughout the year.
How to Avoid Underpayment Tax Penalty
Taxpayers must pay in a minimum amount throughout the year to avoid underpayment penalties. Underpayment penalties don’t typically apply if the tax owed on a return is less than $1,000. However, for federal purposes, if the amount owed is $1,000 or greater a person must typically pay in the lesser of (1) 90% of the actual tax shown on their tax returns filed or (2) 100% of the tax shown on the tax return filed in the prior year (or 110% if the individual’s adjusted gross income exceeded $150,000) in order to avoid the underpayment penalty. For North Carolina purposes, if the amount owed is $1,000 or greater a person must typically pay in the lesser of (1) 90% of the actual tax shown on their tax returns filed or (2) 100% of the tax shown on the North Carolina tax return filed in the prior year in order to avoid the underpayment penalty.
How to Get a Refund of Tax Penalties
The new tax laws that went into effect with the 2018 tax returns created a lot of uncertainty and confusion. As such, many taxpayers were not aware that they weren’t remitting the proper amount of taxes throughout the year. As such, IRS recently granted penalty relief by lowering the 90% threshold mentioned above to 80% upon request. To request this treatment a taxpayer must fill out IRS Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trust and submit it along with their 2018 tax return. Part II, box A, of the form should be checked and include the statement “80% waiver of estimated tax penalty” on the form. What if the 2018 return has already been filed and the underpayment penalty has been paid? In this case, you can request a refund of overpaid penalty by filling out Form 843, Claim for Refund and Request for Abatement and referencing IRC Code Section 6654(d)(1)(B) as the type of penalty to be waived. As of the date of publishing, the NCDOR has not announced similar underpayment penalty relief.
Other Tax Penalty Relief
There are other tax penalty relief options which apply to other types of tax penalties imposed by the IRS and the NCDOR. However, these penalty relief options are granted on a case-by-case basis and require further analysis to determine eligibility.
In closing, there’s a special tax penalty relief option available for people to use on their 2018 tax returns for federal purposes. The penalty relief can be requested with the filing of the returns. However, it may be necessary to file an additional form to obtain a refund for those people who have already filed. Additional tax relief options exist on a case-by-case basis for other types of penalties imposed by the IRS and NCDOR.
About the Author:
Lauren Massie, CPA, EA, MBA resides in Raleigh, North Carolina. The primary focus of her CPA practice is income tax representation for individuals who need tax help with the IRS or the North Carolina Department of Revenue. She regularly assists clients with issues such as penalty abatement, unfiled tax returns, back taxes, wage garnishments, bank levies, installment agreements, and the filing of an Offer in Compromise to settle tax debts. Have questions? Lauren can be reached directly at (919) 792-8511 or through this link.
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Lauren Massie
Lauren Massie, CPA, PLLC
8480 Honeycutt Road, Suite 200
Raleigh, NC 27615
(919) 792-8511
Lauren Massie, CPA, PLLC is based in Raleigh, North Carolina and serves clients throughout the Greater Triangle Area including cities such as Wake Forest, Durham, Cary, Chapel Hill, Morrisville, Holly Springs, Fuquay-Varina, Clayton, Louisburg, Knightdale, Zebulon, Rolesville, Wendell, Hillsborough, Youngsville, Franklinton, Garner, Zebulon, Henderson, Franklinton, Holly Springs, Creedmoor, and Angier.