Underpayment Penalties

[Greg7]

TT is telling me I have an underpayment penalty.   My total tax bill is $16,000.  I paid $6,000 for each of the first 3 quarterly tax payments for a total of $18,000.  Realizing I would get a $2,000 refund, I did not pay anything for the last quarterly payment.  Considering that I paid 'ahead of the curve' with my quarterly payments, why is there a penalty?

Thanks,

[Mike9241]

check your payment entries especially the dates. if you paid the 1st 3 quarters timely based on what you provided there should be no penalties.

[LeonardS]

The U.S. tax system operates as a pay-as-you-go system. What this means is that you must pay your taxes as they occur.  For example, If your estimated tax payment for the first quarter is less than the amount required for the income earned you will incur an underpayment penalty.  This penality is not deleted by any future estimated tax payments even when the estimates exceed the minimum required to avoid a penalty for the quarter.

[Greg7]

Hi Mike, thanks for the quick reply.  The quarterly payment dates and amounts are entered correctly and TT is picking them up correctly.  I looked at Form 2210, which calculates the payment penalty, and it shows that it is not yet completed.  Clearly, the Part III  Penalty Computation Table that is attached to that form is not picking up the dates and payments correctly.  It appears I may have to wait until this calculation gets fixed before I can file.

Cheers,

Greg

[Greg7]

Hi Leonard, you are certainly correct, but that is not the case here.  I have a quarterly tax liability of 16,000/4 or 4,000 per quarter.

Q1 cuml tax liability 4,000; cuml tax payment 6,000

Q2                                8,000;                                  12,000

Q3                                12,000;                                18,000

Q4                                 16,000;                               18,000

Thanks,

Greg                     

[LeonardS]

Were your quarterly payments generated as estimates when you filed your 2020 tax return?  If so the estimates may not equal the individual quarterly payments, due in 2021 to avoid an underpayment penalty.

[Greg7]

Yes, the payments I made were calculated by TT to avoid any tax penalty regardless of how much I owed at tax time.  However, since I didn't pay the 4Q payment, the safe harbor provision of paying more than my previous year's tax wouldn't apply.  Maybe paying more than is currently owed on a cumulative basis isn't sufficient to avoid a penalty.  Does anyone know if that's the case?

[DawnC · Accepted solution]

You probably do not owe a penalty, but Form 2210 (the form that calculates the penalty) will not be ready to e-file until 02/24, see availability chart.    Since the form is not ready, it is likely that it is not pulling the correct date information yet.   Hold up until Form 2210 is ready and see if this issue corrects itself then.

If you really want to file before that (I am not recommending that), there is a box you can check to allow the IRS to figure the penalty and bill you later.   If you chose that option, Form 2210 is not included with your return, so it won't prevent you from e-filing.    But the best option is to wait until 02/24 or whenever the form is finalized and available so you will know exactly what your penalty status (if any) is.  

Why am I getting an underpayment penalty if I'm getting a refund?  According to your facts, this would not apply to you as you did pay timely, but it does explain how the timing works.  

[Greg7]

Thanks Dawn, that explains it.  I wasn't aware of the availability chart.  That sounds like a good thing to check.

Cheers,

Greg

[cynjohnhan]

I have a pretty straightforward return, take standard deduction etc.  I took an RMD from beneficiary IRA's in December as well as making a Roth conversion at the same time and paid the estimated taxes well before the 4th quarter due date.   TT says I am receiving a refund of approximately $3000 yet am being assessed an underpayment penalty.   This is the second time I am paying estimated taxes, with basically the same scenario and did not get this penalty the last time with fairly equivalent numbers so I don't really understand why.   

Also, what is the benefit of waiting for Form 2210 if that says it is for fisherman and farmers, of which I am neither. 

Thanks for any explanation, advice.   

[DianeW777]

Form 2210 is for anyone who has an underpayment of tax and Form 2210-F is specifically for farmers and fishermen. A result such as yours can come about if estimated tax was due and was paid late.  In other words you can have a refund and a penalty for late payment.

In your situation, you can complete the annualized method which will show that you were not required to send in an estimated tax payment earlier because you had additional taxable income in the fourth quarter and you did pay the estimate. The IRS does not know when the money came in, nor can TurboTax know that you have a special situation where money was not received evenly throughout the year. 

The article below will help you to complete the annualized portion to potentially eliminate your penalty.

• Why am I getting an underpayment penalty when I have a refund?

[Greg7]

See Dawn's explanation above.  TT does not have the programming done yet to calculate underpayments.  That programming should be done later in February.