Under pressure from members of Congress, the IRS agreed to provide relief from the underpayment of estimated tax penalty due to the changes brought about by the Tax Cuts & Jobs Act (TCJA) and concerns taxpayers may be under- withheld. The IRS indicated they would provide an 85% safe harbor. Most commentators believed that meant replacing the “90%” in the normal 90% of the current year’s tax liability safe harbor with “85%”.
The IRS just released the 2018 Form 2210 and the 90% still appears on the form, but the Form 2210 instructions provide special instructions and a worksheet for what is termed a “tax reform waiver.” Unlike the other safe harbor payments, the 85% amount paid does not have to be paid evenly over the four quarters. The taxpayer need only have paid in 85% of their tax liability during the year to qualify for the tax reform waiver. That being the case, tax software should be able to apply that exception automatically without any additional input on the preparer’s part. However, one should check with their software provider to ensure the software will automatically do that.
Per the instructions the “85% Exception Worksheet” is completed to see if the taxpayer qualifies for the exemption. If they do, check Box A in Part II, of the 2210 and write "85% Waiver" next to Box A, and file page 1 of Form 2210 with the tax return to request the waiver.
Example: 2018 tax is $5,000; taxpayer’s withholding was $4,300; no estimated tax paid. $4,300/$5,000 = 86%. Since taxpayer prepaid more than 85% but less than 90%, the taxpayer is eligible for the penalty waiver due to tax reform. Had the taxpayer’s withholding been only $4,000 (80% of $5,000), neither the 90% safe harbor nor the 85% tax reform waiver would apply, and the taxpayer would be subject to a Form 2210 penalty.