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Underpayment penalties and Form 2210

So, if you don't pay enough taxes, the underpayment penalty is assessed on the amount it would have taken you to bring in compliance with the penalty. So if you owe 20000 in 2008 and 15000 in 2007 and in 2008 you pay

15K, you owe 5K but no penalties. If you had paid $14900, you would owe 5.1K and penalties on the 100 bucks. This is different than my initial fear, that you could slip by $1 under the amount of 2007's liability and have penalties on the entire difference (i.e. penalties on not just $100 but the whole $5100).

If you do have a penalty and if you want the IRS to assume you had equal withholding and/or equal income payments through the year, you can let them calculate your penalties. If you had fluctuations in your income, you have to fill out schedule AI of form 2210 yourself. One would conclude, however, that it would be IMPOSSIBLE to incur any penalties, so long as you meet one of these conditions:

A) paying 100% (110% if your AGI is 150K+) of last year's liability. See first bullet point under "Who Must Pay the Underpayment Penalty":

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B) paying 90% of this year's liability. See second bullet point under "Who Must Pay the Underpayment Penalty":
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C) underpaying this year's liability by less than $1000. See (2) under "Exceptions to the Penalty":
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D) An obvious logical conclusion of B or C, being entitled to a refund.

Conclusively, the IRS states here:

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4252,00.html"Penalties and interest do not apply in years in which a taxpayer isentitled to a refund." and "Penalties and interest apply to years in whichmoney is owed." Additionally, looking at the flowchart on 2210 suggeststhat as long as you've met one of the 4 conditions above, you're ok. Ah. So everything seems to make sense, hopefully. Read on.

Contradicting itself, the IRS also states, smack dab in the middle of the first page,

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"Therefore, you may owe the penalty for an earlier due date even if you paid enough tax later to make up the underpayment. This is true even if you are due a refund when you file your tax return"

How? If can you owe a penalty if you are entitled to a refund? That would mean you paid more than 90% of this year's liability, so the form tells you "you do not owe a penalty."

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Reply to
nukegoat
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Well, if you have had federal income tax withheld on your W-2 form or 1099 form, the IRS treats that withholding as having been paid ratably and timely throughout the year. So if you end up owing less than 90% of your current year tax, which is a good safe harbor and guaranteed to occur when you get a refund, and all of your tax withheld is on W-2 and 1099s, then your payments are deemed to be timely and there's no penalty.

But when your payments are made by you, through estimated payments, the actual dates and amounts are used. If your payments are back- loaded towards year end, they might not be timely unless you can show your income was also back loaded using form 2210 schedule AI to match net income and tax payments by tax quarter.

Said simpler: you cannot just pay estimates in the later part of the year and expect to avoid undrestimation penalty even if you end up with a refund.

Reply to
Arthur Kamlet

Note that both A and B apply only if your prepayments are any combination of withholding credits and TIMELY EQUAL estimated tax payments. You can front-load ES payments as long as by each ES due date you've paid at least the total due for the year to date under timely, equal payments.

This safe harbor considers only withholding credits, not ES payments.

Not at all. Let's say you have steady income throughout 2008, zero withholding and a total tax liability of $10,000. You make one estimated tax payment of $10,500 on January 15, 2009. You will owe a penalty for failing to timely pay the first three estimated tax installments even though your return will show a refund.

That page is badly written, and the first sentence is correct only regarding the two penalties the page specifically addresses. Actually, it's even wrong regarding the late filing penalty. If you file a refund return late no late filing penalty will be assessed. However, if there's later an audit and additional tax is assessed, you will be charged late filing penalty on the additional tax.

You made up condition D which, as already noted, is wrong. The flowchart on the 2210 does confirm A-C, but with only withholding credits considered. If ES payments are in the mix, you have to go further with the 2210 to see if there's any penalty due.

Reply to
Phil Marti

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