Failed to use annualized income method and received a penalty

[Chancy]

I used Turbo tax to file my taxes and received a penalty for not sending estimated taxes the first three quarters even though taxes were withheld on income for the first 3 quarters.  I failed to use an annualized income method.  I did a 401k rollover to Roth in December and paid the estimated tax on the rollover in the 4 quarter on time. I filed a 1040x but have received a notice that the “IRS can not change the tax penalty because it is based on the tax shown on the original return”.
I overpaid my total tax liability and got a refund.   Is it legal for the government to keep the penalty money if I did an amended return of my taxes?  
Thank you. 

[fanfare]

Penalties:
1040-x Line 16: Subtract any penalty from the amount you owe reported on original 1040.
Don't try to include, but ignore, any new or changed penalty.
IRS will calculate your new penalty on their own and will bill you or refund you

@Chancy 

[Chancy]

IRS wrote they can not give me the penalty back, they are keeping it. 

[Chancy]

They kept it out of my refund.

[fanfare]

did you comply with the above Instructions for Form 1040-X?

You may have to submit a second amendment.

@Chancy 

[dmertz]

For what year?  For years after 2020 you still have time to file Form 1040-X with Form 2210 and Schedule AI (Form 2210) to annualize income and claim a refund.  Tax years prior to 2021 are closed for refund.

Without Form 2210 and Schedule AI (Form 2210), your income is treated as having been received evenly throughout the year, resulting in underpayment of taxes for the first three tax quarters under these circumstances.  Filing Schedule AI is needed to treat the income as received when actually received, reducing the required payments for the first three tax quarters.