@Wiz222 wrote:
@Opus 17 Are you sure about this schedule for income from a 401K? I question it because I don't ever remember when doing my taxes any calculation based on when an IRA distribution was received. The 1099-R does not have a date on it. How would the IRS know what quarter the distribution was made? I'm not an expert which is why I asked you guys but I'm wondering it the schedule shown is only for self employed etc.
By default, the IRS assumes income is spread out over the year and that taxes are therefore required to be paid over the year. For a large lump sum paid on June 27, the IRS would be looking to see that 25% of the estimated taxes were paid April 15, 25% by June 15, 25% by September 15, and 25% by January 15, 2024. You're right the IRS doesn't see the actual date, but it doesn't matter to them. Whether the lump sum was paid on January 1, June 1, or December 31, they will want to see 4 estimated payments of 25% each, and they certainly have a record of your estimated payments. If you have tax withholding when you make your withdrawals, the IRS will also have those dates, because they will have the dates that the broker sent the tax payment to the IRS (probably by the end of the month of the withdrawal). This also applies to other lump sums of income such as the sale of large investments or your house, where the IRS does get the date from the 1099-B or 1099-S form.
That's how the rule book is written, anyway. I can't guarantee the IRS follows the rule every single time, there might be leeway, or there might be situations that they overlook.
"Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts to see if you owe a penalty for underpaying your estimated tax."
https://www.irs.gov/taxtopics/tc306
https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty
There might also be situations where a penalty is called for but the IRS doesn't have enough information to catch the taxpayer at it. For example, if you make a slight overpayment (estimated) now for your June withdrawal, so that you get a small refund when you file your return, the IRS might not have the personnel or computer resources to detect that you missed your required payments for April, June and September. But just because they might not be able to detect it, doesn't change that it is in the regulations as stated. There are probably a lot of regulations that are difficult to catch people breaking. That's why there are audits, not to catch 1 past cheater, but to create fear and anxiety and deter 10 future cheaters.
In your case, the regulations say that you should have made 4 period payments, and that you can file form 2210 with your tax return and use the annualized payment calculation to minimize your possible penalty. In other words, declare up front that you missed the window and try to mitigate the damage. The penalty for underpayment is about 1-2% of the amount of the underpayment per month, depending on current interest rates. You certainly could make a payment now and ignore the issue on your return with the expectation that the IRS won't catch you. I can't give advice one way or the other.
Regardless of how easy or difficult it might be for the IRS to catch you, it is in the regulations that payments are due spread out over the year even if the income is not, and that's for everyone, not just self-employed.
