IRS Notification re Estimated Tax Penalty

[Dan S9]

A tax preparer reviewed and filed my 2024 Federal taxes. The completed return showed that I was due a refund and did not include any penalties. I received the refund, which was lower than the amount on the return, and subsequently received IRS Notice CP30 saying a penalty was charged for failing to pay estimated taxes, and my refund has been reduced. The Notice says, "We reviewed your estimated tax penalty computation for the tax period ended 2024, and found an error," and includes the penalty calculations.

My return included Form 1040 with Schedule C for self-employment earnings, Schedule B for interest and dividends, and Schedule D for capital gains. I paid my quarterly estimated taxes on the due dates, but increased the payments in Q3 and Q4 to account for a Roth conversion and realized capital gains in the 2nd half of the year.

I spoke with another tax preparer from the same company (since the one I worked with was out of the office) to review the Notice. I was told the IRS was responsible for calculating the penalty, not the tax preparer. 

I have the following questions:

1) Why did I owe a penalty since my overall tax payments satisfied the required taxes, and I was due a refund? My understanding is that a penalty may be avoided if a taxpayer owes less than $1,000 in tax.

2) Who is responsible for calculating the estimated tax penalty - the tax filer/preparer or the IRS?

3) Since my income increased in the 2nd half of the year, should the tax return have included Form 2210 - Schedule A1 - Annualized Income Installment Method computation to avoid the penalty?

Thank you for your time and attention to this post.

[SoCalGal21]

If you owe the IRS 2 years in a row, the IRS can legally determine you needed to pay Quarterly Estimated Taxes for the balance.  The last quarterly payment is due Jan 15th of the year you will file.  So 1/15/2025 for the 2024 year tax return.  The penalty is based on when the actual payments were made, as the IRS has access to all the payroll tax payment amounts and dates paid.  Unless you provide all your paystubs to your tax expert, they cannot report these payments accurately to calculate the penalty.  Here at TurboTax Full Service we err on the other side.  We recommend paying the penalty so the IRS doesn't continue to accrue interest and penalties on you.  And sometimes part of the penalty is refunded once the return is processed.

Some ways to avoid an Estimated Tax Penalty for 2025 are  to pay Estimated Tax Payments to the IRS by 1/15/2026 or  increase your withholdings.

If you found this advice helpful, please let us know.

Best regards,

Catherine

TurboTax Expert

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[marctu]

In general, to avoid an estimated tax penalty you would want to meet the Safe Harbor requirements (See: Underpayment of estimated tax by individuals penalty )

• Pay at least 90% of your current year's tax liability: Estimate your total tax liability for the current year and ensure your payments (withholding and estimated payments combined) cover at least 90% of that amount.
• Pay 100% of your previous year's tax liability: You can avoid a penalty by paying 100% of the tax shown on your previous year's return (110% if your adjusted gross income was over $150,000, or $75,000 if married filing separately). 

Based upon you receiving a CP-30 you did not meet the Safe Harbor requirements.

The $1,000 threshold in estimated tax payments refers to the amount of tax you expect to owe for the current tax year, after subtracting your withholdings and refundable credits.   Your estimated tax payments that you made for all four quarters are not included in this calculation.   In short, since the refund was generated because of the estimated tax payments and not withholding and refundable credits this is the reason you have an estimated tax penalty.

The next two questions are intertwined.   While TurboTax automatically calculates and adds an underpayment penalty to your tax return if you didn't pay enough estimated taxes throughout the year, or if your withholding wasn't sufficient, it would appear your preparer did not do so.  I would say it is best to calculate the penalty, as Turbo Tax does, as well as annualize income if there was income that was received during the year that is not equal across the quarters.  

Thank you for your question @Dan S9 

Thank you for choosing TurboTax Live and have a great day!

All the best,

Marc T.

TurboTax Live Tax Expert

28 Years of Experience Helping Clients

[mbpeddie]

Hello,

I am sorry to hear you received a CP30  notice for underpayment of estimated taxes. I hope to clarify this for you. To answer your questions:

1. Why did I owe a penalty since my overall tax payments satisfied the required taxes, and I was due a refund? My understanding is that a penalty may be avoided if a taxpayer owes less than $1,000 in tax.

Answer: The estimated tax penalty is not based on whether you had a refund or not.  It is based on your tax liability. Self employed contractors who expect to owe more than $1000 in taxes after withholding and refundable credits  are subject to estimated payments as there is no withholding from the self employment

2. Who is responsible for the estimated tax penalty - the preparer or the IRS? The estimated tax penalty is calculated on the tax return and appears on line 38 of the 1040.

3. Since my income increased in the 2nd half of the year, should the tax return have included Form 2210 - Schedule A1 - Annualized Income Installment Method computation to avoid the penalty? By choosing to compare the annualized income installment method , only a small portion of your income would be earned at the beginning of the year.

I have included more information on the estimated tax penalty:

https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty

I 

[Pamela-M]

A penalty is generally assessed if you owe $1,000 or more in taxes, paid 90% of taxes in the current year or if you have paid %100 percent of taxes in the prior year.   There are also rules for high income individuals.   If income is not received evenly throughout the year, this would affect how taxes must be paid to alleviate any penalties. 

The 2210 would calculate penalties if they were to be included on the return.  
https://www.irs.gov/pub/irs-pdf/i2210.pdf

The IRS ultimately calculates all penalties and interest.
https://www.irs.gov/payments/penalties

If income is unevenly received throughout the year, you may be able to have the penalty reduced or removed.
https://www.irs.gov/individuals/understanding-your-cp30-notice

Thanks for the question.