If i pay all of my taxes out of my IRA in late december is that considered on time and no penalty for not paying them thru the year

[rjs]

It depends on exactly what you mean by paying out of your IRA. If you have the IRA custodian withhold tax from your IRA distribution then, yes, withholding is treated as having been paid evenly through the year, even if it's actually all withheld in December. But if you are taking money out of your IRA without having tax withheld, and you use some of the money that you took out of the IRA to make a tax payment, then it's just a payment that you make in December, and you would probably incur a penalty for not having paid during the year.

[Opus 17]

In general, the tax system is supposed to be pay-as-you-go, you are supposed to pay your taxes evenly over the entire year, via withholding or estimated payments.  Paying in full at the end of the year can still result in a penalty for underpayment throughout the year.  Even if all your income is a lump sum paid in December, and you also make a tax payment or withholding in December, you can be assessed an underpayment penalty because the IRS assumes the income was paid to you evenly.  (For example, your 1099-R doesn't specify if a $12,000 IRA withdrawal was paid $1000 per month or $12,000 in December.)

When you have a lump sum of income, you can file a form 2210 using the "annualized income method" which is a way of showing the IRS that your income was "lumpy" and you paid the appropriate tax in each quarter for the income you received in that quarter.

There are some other rules on penalties, it will depend on your overall income and payments.  We would need more details to explain further. 

[fanfare]

"all of my taxes"

If at least 90% of your tax is through withholding, you will not incur any penalties.

You will not have to make Estimate Tax Payments.

@drings13 

[Texas621]

Regarding quarterly estimated taxes and IRA withrawals, if the IRA withdrawal only occurred in the 4th quarter and you paid estimated taxes by the 4th quarter due date (mid-January), would there be any penalty?  The estimated taxes paid by the January due date were 92.8% of the final taxes for the year.  I reviewed Form 2210 and it indicated I did not need to file the form.  I paid more in 4th quarter taxes than the prior year tax bill.

I have written to the IRS, but my concerns are falling on deaf ears.  They are treating the December withdrawal as annualized for each quarter and charging penalites going back to the 1st, 2nd and 3rd quarters. I informed them that the withdrawal did not occur until December 19th of the tax year.

Am I correct? 

[fanfare]

As mentioned above, when withholding is too low,  it is not sufficient to pay the estimated tax in the third or fourh period.

@Texas621 

[Opus 17]

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@Texas621 wrote:

Regarding quarterly estimated taxes and IRA withrawals, if the IRA withdrawal only occurred in the 4th quarter and you paid estimated taxes by the 4th quarter due date (mid-January), would there be any penalty?  The estimated taxes paid by the January due date were 92.8% of the final taxes for the year.  I reviewed Form 2210 and it indicated I did not need to file the form.  I paid more in 4th quarter taxes than the prior year tax bill.

I have written to the IRS, but my concerns are falling on deaf ears.  They are treating the December withdrawal as annualized for each quarter and charging penalites going back to the 1st, 2nd and 3rd quarters. I informed them that the withdrawal did not occur until December 19th of the tax year.

Am I correct? 

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The IRS assume that all lump sum income is paid evenly over the year, so they expect estimated taxes to also be paid evenly over the year.  The solution to this is to file form 2210 using the "annualized income method" on page 3.  Using the form in this way, you show the IRS your income by quarter, and that your payments in each quarter were appropriate for the income in that quarter.  (The name "annualized income method" seems the opposite to me of what is actually happening, but that's the IRS for you.)

You should have included form 2210 with your tax return using the annualized method.  Possibly, Turbotax is at fault for not recommending this.  You have 60 days from the IRS notice to file a claim.  Turbotax would cover any part of the penalty that is due to their error, if they accept the claim, but you are still responsible for whatever the correct tax and penalties would have been. And you still need to fix this with the IRS and pay now.  You can't sit around waiting for Turbotax to make a decision because the penalty will grow and Turbotax won't be responsible for that.  

https://ttlc.intuit.com/turbotax-support/en-us/help-article/account-management/turbotax-100-accurate...

At this point, I assume the IRS sent you a letter, which should contain the address of an office to dispute or appeal the assessment.  You should prepare a form 2210 using the annualized method to recalculate the penalty, then send the form to the office along with a check for the revised amount.  In fact, you should probably prepare an entire amended tax return that includes form 2210.  Mail the amended return with your payment to the office that sent the notice, not the general address for amended returns.  Keep copies for your records and use a mail service with tracking and proof of delivery.  Make sure you reply before the deadline for appealing the assessment, or else you lose your right to challenge and the amount due becomes final. 

[fanfare]

Estimated Tax is credited on the date you paid it. That's why you can be penalized if you don't make a first payment before 4/15 or second payment before 6/15 even if your final 

[withholding + estimated tax] is 90% of your tax.

@Texas621 

@drings13 

[Opus 17]

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@fanfare wrote:

Estimated Tax is credited on the date you paid it. That's why you can be penalized if you don't make a first payment before 4/15 or second payment before 6/15 even if your final 

[withholding + estimated tax] is 90% of your tax.

@Texas621 

@drings13 

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@fanfare 

It doesn't have anything to do with withholding or late payments.  The due date for 4th quarter estimated tax payments is January 15.  Regardless of whether the had excess withholding on the IRA withdrawal in November, or made a large excess estimated payment on January 14, it would still rise to a penalty because using the IRS default method, the IRS will determine that 1/4 of that withholding was due the previous April, June and September, before the withdrawal was made.  The solution is to use the annualized method on form 2210, schedule AI. 

[fanfare]

Me: "IRS already knows your extimated tax payments per your account with IRS.

You: " It doesn't have anything to do with withholding or late payments. the IRS will determine that 1/4 of that withholding was due the previous April, June and September, before the withdrawal was made. "

your statements are self-contradictory.

My comments were with regard to Form 2210.

"The solution is to use the annualized method on form 2210, schedule AI. "

Not convinced that Schedule AI will solve the problem in all cases where  [ withholding+ Estimated tax] = 90% of tax OR 110% of prior tax, whichever is smaller.

BUT, Schedule AI is beyond my powers of calculation. So I stay away from it.

@Opus 17 

[NCperson]

@fanfare  while form 2210 and 2210ai are complicated and in effect you have to complete your tax return 4 times (one for each period of the year), it is the way to indicate to the IRS that the taxpayer's income is "lumpy".  

if your income is quite low from Jan 1 - Dec 30 and then on Dec 31 you do a large Roth conversion (or hit the lottery or whatever that generates a boatload of income), making the estimated payment by Jan 15 and then  completing 2210 and 2210ai informs the IRS that you were not required to make estimated payments for the first 3 payments, but made the appropriate payment for Jan 15 estimate and therefore no penalty may be necessary. 

without form 2210 and 2210ai, the IRS really doesn't know the income was "lumpy" and they otherwise assume 1/4 of the income occurred each quarter.   The penalty is then determined based on smooth income by quarters and the timing of any estimated payments. 

[Opus 17]

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@NCperson wrote:

without form 2210 and 2210ai, the IRS really doesn't know the income was "lumpy" and they otherwise assume 1/4 of the income occurred each quarter.   The penalty is then determined based on smooth income by quarters and the timing of any estimated payments. 

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Specifically here, the 1099-R will show the same amount regardless of whether the taxpayer withdraws (for example) $5,000 per month or $60,000 on November 15.  By default, the IRS assumes the income was evenly distributed, so they will be looking for estimated payments in April, June and September. 

@fanfare 

"Me: "IRS already knows your extimated tax payments per your account with IRS."

This is precisely the problem.  Suppose there are wages, or a pension or social security, with withholding, plus a large lump sum IRA withdrawal in the 4th quarter.  The IRS will assume the IRA withdrawal was also evenly paid over the year.  Looking at the regular withholding, it won't be enough to cover the tax on the lump sum IRA withdrawal, so the IRS will determine that in addition to the regular withholding on the periodic income, there should have been quarterly payments made in April, June and September to cover the additional tax on the IRA.  The IRS doesn't know the IRA was a lump sum in the final quarter unless the taxpayer uses form 2210AI.