Underpayment penalties and Form 2210


N

nukegoat

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":
http://www.irs.gov/pub/irs-pdf/i2210.pdf

B) paying 90% of this year's liability. See second bullet point under "Who
Must Pay the Underpayment Penalty":
http://www.irs.gov/pub/irs-pdf/i2210.pdf

C) underpaying this year's liability by less than $1000. See (2) under
"Exceptions to the Penalty":
http://www.irs.gov/pub/irs-pdf/i2210.pdf

D) An obvious logical conclusion of B or C, being entitled to a refund.

Conclusively, the IRS states here:
http://www.irs.gov/businesses/small/article/0,,id=174252,00.html
"Penalties and interest do not apply in years in which a taxpayer is
entitled to a refund." and "Penalties and interest apply to years in which
money is owed." Additionally, looking at the flowchart on 2210 suggests
that 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,
http://www.irs.gov/pub/irs-pdf/i2210.pdf

"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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A

Arthur Kamlet

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":
http://www.irs.gov/pub/irs-pdf/i2210.pdf

B) paying 90% of this year's liability. See second bullet point under "Who
Must Pay the Underpayment Penalty":
http://www.irs.gov/pub/irs-pdf/i2210.pdf

C) underpaying this year's liability by less than $1000. See (2) under
"Exceptions to the Penalty":
http://www.irs.gov/pub/irs-pdf/i2210.pdf

D) An obvious logical conclusion of B or C, being entitled to a refund.

Conclusively, the IRS states here:
http://www.irs.gov/businesses/small/article/0,,id=174252,00.html
"Penalties and interest do not apply in years in which a taxpayer is
entitled to a refund." and "Penalties and interest apply to years in which
money is owed." Additionally, looking at the flowchart on 2210 suggests
that 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,
http://www.irs.gov/pub/irs-pdf/i2210.pdf

"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."

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.
 
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P

Phil Marti

nukegoat said:
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":
http://www.irs.gov/pub/irs-pdf/i2210.pdf

B) paying 90% of this year's liability. See second bullet point under "Who
Must Pay the Underpayment Penalty":
http://www.irs.gov/pub/irs-pdf/i2210.pdf
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.
C) underpaying this year's liability by less than $1000. See (2) under
"Exceptions to the Penalty":
http://www.irs.gov/pub/irs-pdf/i2210.pdf
This safe harbor considers only withholding credits, not ES payments.
D) An obvious logical conclusion of B or C, being entitled to a refund.
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.
Conclusively, the IRS states here:
http://www.irs.gov/businesses/small/article/0,,id=174252,00.html
"Penalties and interest do not apply in years in which a taxpayer is
entitled to a refund." and "Penalties and interest apply to years in which
money is owed."
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.
Additionally, looking at the flowchart on 2210 suggests
that as long as you've met one of the 4 conditions above, you're ok.
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.
 

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