Letting the IRS figure out underpayment penalty

[cririuss_ca]

Thanks to TurboTax Community,  almost all of my tax questions have been addressed 😄 

I am wondering will IRS ever assess a higher underpayment  penalty than what TurboTax assessed?  

[LindaS5247]

Yes, because the IRS calculates the actual penalty based on your specific quarterly underpayments, so it is possible that a higher underpayment penalty could be assessed. They could even send you a refund if the estimate was above what the IRS determines.

TurboTax calculates an estimated underpayment tax penalty based on the information that you have entered. The IRS (or State Agency) can calculate this based on the information they have, and the amount may not be the same. The IRS applies more precise quarterly calculations based on when your income was actually received. Penalties can be higher, especially if payments were made unevenly throughout the year.

If you receive a notice for a higher amount, you can review it and possibly request a waiver based on reasonable cause. 

See also:

Penalty relief for reasonable cause

Guide to IRS Tax Penalties: How to Avoid or Reduce Them

If you have additional information or questions regarding this, please return to Community and we would be glad to help.
 

[cririuss_ca]

thank you @LindaS5247 !  Here is my follow-up.

I want to figure out how TurboTax will calculate my actual underpayment penalty by going  into "Turbotax > Federal Tax > Other Tax Situations >  Underpayment Penalties" section where it lets me choose the "Annualized Income" option to help "lower" my penalty.  Under the "Annualized Adjusted gross income" section I judiciously entered the cumulative income  I received for the four periods ( first 3 months, first 5 months, first eight months, and total income for the year) using my bank and brokerage statements , and also entered the "Net Capital Gains" section  where I entered the cumulative $ amount of stock dividends that I received for each of the same four periods - again using the 1099-DIV statements from  my brokerage.   After I entered the actual income in all the periods for both sections   I see that Turbotax actually assesses the same penalty as it did without me entering those Annualized period spreadsheet.   ( TurboTax  fills the last period of the "Net Capital gains" section with  the total 1099-DIV with the first three periods left blank).

With this finding I am leaning towards accepting the TurboTax's penalty assessment.   I hope IRS does not charge extra over the TurboTax's assessed value - am I right with this assessment? 

Also finally,  I read the Safe Harbor rule where it says that as long as I had enough withholding tax in the prior year (aka 2024)  the penalty could be waived -  I was employed in 2024 and my W-2 took care of the withholding taxes (and yes I did withheld enough), and to be sure  I checked line 38 (penalty change)  of the 2024 Form 1040 and it shows ZERO.      So I am wondering why I am being charged with penalty now, given my 2025 income is much, much less than 2024? 

[baldietax]

Not sure your situation why you are applying the AI method but it will only reduce your penalty if you made late ES payments due to late income (e.g. Q4 Roth conversion) and need to show how they line up.  If your ES payments were late compared to the income then AI won't help.

Turbotax uses the same Form 2210 calculations as IRS - I'm not understanding the comment from @LindaS5247 above "Yes, because the IRS calculates the actual penalty based on your specific quarterly underpayments, so it is possible that a higher underpayment penalty could be assessed" - Turbotax is doing the same calculation as IRS.  But the IRS is re-assessing the input data independently (including ES payments) - the only reason for IRS to assess a different penalty should be due to a mistake in your return that they adjust, or difference in 2024 information used in the safe harbor calc etc.  I've filed with TT for years and had my share of penalties and never had IRS correct any.  You can check the calculations on Form 2210 in Forms mode on desktop tho it is not part of your filing unless you have are adopting one of the options in Part 2.

Re safe harbor rule - what exception/waiver are you referring to? - see... 

https://www.irs.gov/pub/irs-pdf/i2210.pdf

... covering your 2024 tax with withholding does not excuse you from 2025 penalty.  You can avoid penalty by covering 100% (or 110% if "higher income") of your 2024 tax in 2025 thru withholding or estimated taxes, if that is less than 90% of your 2025 tax.  If your tax increased from 2024 to 2025 that can be helpful to use prior year tax, if it decreased in 2025 you still need to cover at least 90% of that in a timely manner.  You may be eligible for other waivers tho, not sure all the conditions.

[baldietax]

sorry just to clarify my language in last para - "covering your 2024 tax with withholding in 2024, does not excuse you from 2025 penalty."

[cririuss_ca]

Thanks @baldietax for your helpful inputs.  

In my case I paid ZERO estimated tax on all four quarters of 2025, and only had a "withholding tax" which was taken from my unemployment benefits in January and February).  

I will just let IRS calculate the penalty and hope for the best (no more than what TurboTax assessed).