I'm sorry to hear of your unpleasant audit. I'm reading that no taxes were included when you filed your return for this additional consulting work? You are required to report the Self-Employment income on a Sch C. If you do this within the TurboTax program, it will calculate the income tax and SE tax for you on the return and include the balance due for you to pay via 1040V voucher. This would have avoided a large amount of SOME of the penalties and interest at a minimum but not all. Keep reading.
Our tax system is pay-as-you-go so you must estimate what you believe will be your net earnings for self employment (Income minus expenses) plus any other income, especially income that has no tax withholding. You can use our Taxcaster for this purpose. If it looks like you will owe $1,000 or more for the year, you are required to make quarterly ES payments. The amount of tax would be 15.3% of your net earnings from self employment PLUS income tax due on your SE net income PLUS any other non-withheld income (dividends, interest, capital gains, etc.) less any withholdings and credits. Here are the income tax brackets for 2024:
Divide this total figure that is in excess of $1,000 by 4 and there you have your estimated quarterlies. Even if you don't owe over $1,000, you may want to pay in some tax if you owe over the threshold for paying SE tax which is $400. The ES payments are made electronically or by mail on this schedule:
| Payment Period |
Due Date |
| January 1 – March 31 |
April 15 |
| April 1 – May 31 |
June 15 |
| June 1 – August 31 |
September 15 |
| September 1 – December 31 |
January 15* of the following year. *See January payment in Chapter 2 of Publication 505, Tax Withholding and Estimated Tax |
| Fiscal Year Taxpayers |
If your tax year doesn't begin on January 1, see the special rules for fiscal year taxpayers in Chapter 2 of Publication 505 |
| Farmers and Fishermen |
See Chapter 2 of Publication 505 |
This is what you should have done. But since your question is more specifically on what you should do now, you may want to consider asking for an abatement of penalty. The tax and interest will always be due. The IRS has a host of penalties. These two apply to your situation:
- The estimated tax penalty: Equal to the interest lost by not having sufficient withholding or paying estimated taxes throughout the tax year.
- The failure to pay penalty: 0.5% per month of balance due, maximum of 25%.
Failure to Pay (FTP) generally requires abatement because the IRS assesses these penalties electronically through its computer systems when a return is filed, or a transaction is made on a balance due account. You can request abatement of penalties within the normal refund statute of limitations which is three years from the date the return was filed or two years after the penalty was paid. You can use one or both of the following causes to increase your chances:
- Reasonable Cause Relief - Where the taxpayer can show that they used ordinary care and prudence, but they could not comply (file or pay on time) due to unforeseen circumstances outside of their control (“Reasonable Cause” excuse for noncompliance).
- IRS’s First-time Penalty Abatement Relief (FTA): Can be used to abate the FTP penalty for a taxpayer in good standing (filed all returns, paid all taxes or in an IRS agreement on the balances owed) with clean compliance history (no penalties in past three years prior to the penalty year).
Unfortunately, the estimated tax penalty is generally not abatable. You can request an exclusion from the penalty when filing your tax return using Form 2210.
You can also annualize your income if it is received unevenly during the year. This may help avoid or lower the penalty. Complete Schedule AI on Form 2210 to calculate the penalty using the annualized income installment method.
The underpayment penalty will be waived if the IRS determines that:
- For the tax year involved or prior the taxpayer retired after reaching age 62 or became disabled, and the underpayment was due to reasonable cause (and not willful neglect); or
- The underpayment was due to a casualty, federally declared disaster, or other unusual circumstance, and it would be inequitable to impose the penalty.
Since you were the subject of an audit, you may want to review the documentation that came with the finalization of that audit as there is a process to appeal. You may also want to consult a tax specialist to represent you in this matter.
Cheers!
