This summer, we have seen an increase in the number of clients who have received small checks from the IRS that they weren’t necessarily expecting.  Why is this?  Should you cash the check?  Are they going to bill you next? 

We have been keeping you updated about the change in the tax rates and withholding tables that arose from the 2018 Tax Cuts and Jobs Act (TCJA).  Our previous discussions have been around making sure you are having enough taken out of your paychecks now, because it had been found the “fix” to the withholding tables went too far. 

Generally, the rule is you have to pay 90% of your current year tax liability or 100% (and in many cases 110%) of your prior year tax liability in order to avoid tax penalties.  We operate on a “pay as you go” system, so you cannot always just wait until year end to make payments on your tax bill without the chance of a penalty being imposed. 

In early January of 2019, due to the decreased withholding as previously discussed, the IRS changed the penalty threshold for the first measurement from 90% of current year, to 85% of current year.  This allowed fewer unsuspecting and unknowingly taxpayers to be faced with penalties due to decreased withholdings from the TCJA.  Then near the end of March, 2019, they changed their mind again onthe first test to now be 80% of the current year liability. 

Because it was actually so close to the April 15th deadline, several people had already filed their taxes under the first adjustment to the rule of 85%.  Now, we are finding the IRS is getting returns processed and for those returns completed and transmitted that may have been less than 85% of taxes paid in, but over 80% of tax liability paid in , they are automatically adjusting your returns and refunding the penalty that had been calculated. 

Your KT professional is available to help you interpret any correspondence from the IRS. Several clients have received refund checks, and we have helped verify their accuracy.  In the future, it would make everyone’s life easier if we had a completed, approved, and final tax law before filing tax returns!  If you have received something like this and aren’t fully sure why, please be sure to reach out to your KT team member.