How does the IRS know to charge you a penalty for lack of withholding if your income is uneven during the year?

[crash345u]

My understanding is unless you pay enough tax each quarter during the year to cover the quarterly income, the IRS can give you a penalty, regardless of the fact that you pad sufficient TOTAL tax by the end of the year.

How does the IRS know exactly when you received the income during the year? I have never seen a place in TT to enter when the income was received. Yes I know you can pay enough based on last year's taxes to avoid the penalty but I still don't understand how the IRS knows at what time the income was earned?

[VolvoGirl]

Did Turbo Tax give you a penalty on 1040 line 38?   You can enter when you received the income.  You fill out form 2210.

You might be able to eliminate it or at least reduce it. You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you. It's form 2210.

How to add form 2210 for Underpayment Penalty
https://ttlc.intuit.com/community/tax-payments/help/how-do-i-add-form-2210/00/25703

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

If you have the desktop program you can switch to Forms Mode (click forms in the upper right (left for Mac)) and open the 2210 form. If the 2210 doesn't show up in the left column, click on Open Forms at the top of the left column. Type 2210 in the search box and open the 2210 form. Check box C to let the IRS calculate it.

[CSKcpa56]

The IRS systems assume you earn your income equally throughout the year. this might not be the case for realtors, or self-employed folks, or people who have change/lost jobs. Input your income on the F2210 in the quarter you earned it. That way the penalty should be less. 

If you are charged a penalty and you don't think you should owe it, there is a First Time Penalty Abatement tool on the irs website. Often if you have not had penalties assessed against you the last 3 years you can get a FTA but you generally have to request it. 

[fanfare]

see Schedule AI to report uneven income and estimated tax.

That's how the IRS will know.

Form 2210 uses the default of evenly spaced.

Using step-by-step, only if that gives you a penalty would you get a chance to use Schedule AI.

If you are itemizing, there are questions about how to handle the SALT cap on Schedule AI.

Maybe you can figure it out.

@crash345u 

[crash345u]

So what still confuses me, If I make a  single massive estimated payment at the end of the year, then would the IRS care if I my withholdings were way to little throughout the year? How would they know as long as I was good  by Dec 31?

I never knew about Schedule Al since I never had a penalty to worry about. But my income is becoming more uneven and unpredictable with time. I understand I can make quarterly payments, I just don't understand why I can't just "square up" at the end of the year.

[VolvoGirl]

Yes they care.  You are suppose to pay in evenly during the year.  You can't just make a big estimated payment at the end of the year unless that's when you had a big increase in income.  I had a refund once and still had a penalty for not paying in evenly during the year.

[Mike9241]

the rules state that you owe 1/4 of your taxes for each period (quarter) regardless of actual liability for that period. that's the default. so the IRS/Turbotax don't have to know what each quarter's income was. there is an optional Annualized Income section on the 2210 which if you go through it your liability is determined by period based on income/deductions/ additional taxes/tax credits/withholding and estimated payments for each period.   

[crash345u]

Is my understanding correct based on the post below by VolvoGirl and Mike9241:

With the example below, I can make equal quarterly estimated payments throughout the year sufficient to cover Q1 and not worry about a penalty?

Q1 income = $10,000

Q2 income = 0

Q3 income = 0 

Q4 income = 0

[crash345u]

VolvoGirl Can you please explain exactly what information TT used in your return to determine there was a penalty even though you had a refund? TT did not tell me I had a penalty on the 1040 line 38 but my income was very uneven. 

Unless TT prompted you to enter quarterly income vs estimated tax paid per quarter, I still don't see how TT can know there is a penalty. Do I have to physically obtain F2210 from the IRS website and manually calculate this, TT does not prompt me during the interview or handle this calculation? I am using the online version.

It makes sense to me there is no penalty if none of my withholdings were from estimated taxes, so my withholdings were therefore spread evenly across the year and the IRS would be good with that based on what I am reading here. But if estimated quarterly taxes are paid, I would expect TT to prompt with more questions. How can TT possibly know there is a penalty if you had a refund unless it knows about income dates vs tax payment dates?

[fanfare]

your estimated tax payments are entered by you to go on Form 1040 Line 26

as mentioned above, the simplified calculation on Form 2210 uses the assumption of evenly spaced withholding, not estimated tax.

[fanfare]

Prior year's tax method:

If your quarterly withholding + estimated tax in 2023 are at least 100% / 4 = 25% ( 110% / 4 for certain high income taxpayers) of your 2022 tax, there will be no penalty on your 2023 tax return, regardless of any jump in income.
you are protected from a sudden capital gain at year end, for example.
you know your prior year's tax when you file by April 15, which is also the first estimated tax payment due date.

there is no "square up at year end" method.

[fanfare]

you must estimate your total tax for the year.
you can base your estimate on prior year's tax , or 90% of this year's tax, whichever is smaller.
each quarter your estimated tax paid and withheld must be at least 25% of the estimate, even if your income is uneven,
if your estimate is based on this year's tax and turns out to be wrong you may be penalized.
you can compensate by overestimating.

The operative factor is 25%.

@crash345u 

[crash345u]

I appreciate all the great advice here, but I am reading that if you have W4 wage income or IRA distributions, you are allowed to have tax year liability withheld from those sources in a single payment as late as Dec 31 and it's deemed as though it was spread out over the year (Ref IRC Section 6654(g)(1)).

I have found this information on several  tax planning websites and they all agree. 

[VolvoGirl]

Your return in Turbo Tax doesn't know when you got the income (like Q1).  It spreads the income out evenly over the 4 quarters.  So even though you don't have income in Quarter 2, 3 & 4 it shows a tax liability for each quarter.  Then it thinks you didn't pay in enough for those quarters.

All you have to do is go though the 2210 form and annualize the income and payments.  You can do that in the Online version as I posted in my first post.  

[fanfare]

If your withholding alone exceeds the required annual payment (the estimate), then it doesn't matter when your withholding occurs.

Estimated tax is for taxpayers who anticipate too little, far too little, or no withholding.

estimated tax is due on or before the four period end-dates.

@crash345u