Underpayment penalty and natural disaster in California

[wilsoneee]

Hi: I was using TurboTax and was told that I have an underpayment penalty of a few hundred.  And then TurboTax showed me that I could apply for penalty waiver because of natural disaster. 

In California, there were winter storms (and actually the tax deadline was extended to October because of this):

https://www.irs.gov/newsroom/irs-announces-tax-relief-for-victims-of-severe-winter-storms-flooding-a...

Would it automatically qualify me for the underpayment penalty waiver?

Thanks!

[guywong]

IRS Notice CA-2023-01 automatically qualifies you for any "late payment" penalties waiver if you live in the affected counties but I don't think it provides any "underpayment" penalties waiver unless the penalties are solely caused by the 2022 4th quarter estimated tax payment.

Underpayment penalties are accessed when there are insufficient withholdings or estimated tax payments throughout 2022.  The only exception is the 4th quarter estimated tax due on Jan 17, 2023.   Late payment penalties are payments due April 15, 2023 but not paid (until Oct 16, 2023).  

IRS erroneously sent out late payment penalties notices earlier to qualified Calif residents earlier this year.  They have since apologized for the erroneous notices.  If you received one of those notices, you need to contact the IRS.  Here's an announcement by Spidell:

Do not ignore all IRS notices related to disaster postponements (06-16-23)

The IRS has updated their California disaster related postponement notice (CA-2023-01) to clarify that taxpayers should not ignore late-filing or late-payment notices, even if they qualify for the disaster-related postponement relief.

The notice states that if a taxpayer receives a late-filing or late-payment penalty notice from the IRS that has an original or extended filing, payment, or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.

These late-filing or late-payment notices should be distinguished from the CP14 balance due notices that were automatically sent out earlier this month. As the IRS previously announced, the CP14s were sent out as a legal requirement when the originally scheduled due date had passed, to inform taxpayers that they had 21 days to pay. But that 21-day period did not apply to those who qualify for the disaster-related postponement and the IRS stated those notices can be ignored.

However, late-payment or late-filing notices should not be ignored. Taxpayers or their tax professionals should call the number on the notice and explain that the taxpayer qualifies for the disaster postponement relief.

[beginer1]

Thanks for the reply!

I have some followup questions.

- How can I make 1040es payment (for Q4 2022) now? All listed payment methods can only pay 1040es for the current quarter.

- I also owned a couple hundread bunks because I rollovered 401k (pre-tax to roth) in Q4 2022 and that makes my withold not enough. Is it possible to do quarterly forms and make 1040es payment to catch up and waive the underpayment penalty? I probably won't do that as it's toooo much work but I'm curious about the answer.

- I also noticed that TurboTax will change the underpayment penalty depending on the date of 1040es payment (I tried some dummy numbers). Say I managed to pay 1040es for Q4 2022 today (10/1/2023), it won't reduce any underpayment penalty. But if I claim I made 1040es payment for the same amount one year ago 10/01/2022, it can largely reduce the penalty. Is this expected (I always had the impression 1040es is for that specific Q and doesn't matter when the payment is made)?

[fanfare]

It doesn't makes any sense to make ES payments after April 15 Tax Day.

All tax is due on April 15th.

On my ES penalty worksheet, the penalty on the fourth payment is calculated up to April 15, 2023 at an annual rate of 7%.

Instead use the "Balance Due" category on the IRS Make a Payment page.

@beginer1 

[beginer1]

Then I'm confused. IRS says the deadline is extended to Oct. 16th for for victims of severe winter storms. source 

Quoted from IRS:

The Oct. 16 deadline also applies to the estimated tax payment for the fourth quarter of 2022, originally due on Jan. 17, 2023. This means that taxpayers can skip making this payment and instead include it with the 2022 return they file, on or before Oct. 16.

The Oct. 16 deadline also applies to 2023 estimated tax payments, normally due on April 18, June 15 and Sept. 15. It also applies to the quarterly payroll and excise tax returns normally due on Jan. 31, April 30 and July 31.

[guywong]

@beginer1  You did not say whether you live in a presidential declared disaster area where the IRS has postponed the filing date and payments due after Jan 9, 2023 to Oct 16, 2023.  Some of answers will be different if you do.

Anyway, here are my answers to your questions:

To make a 2022 Q4 ES payment today, you should click on this link, https://www.irs.gov/payments, and follow the instructions.  If you don't live in a disaster area, your payment for 2022 Q4ES and balance due need to be paid by Apr 15, 2023.  However, if you do live in one of the presidential declared disaster areas, then it's not too late to make the payment now (by Oct 16, 2023) and avoid all late payment penalties and reduce some or all of the underpayment penalties.  Just pay everything as 2022 Q4ES and suppress penalty calculations in TurboTax, assuming that can be done.  IRS will bill you for any underpayment penalties you may owe.  I'm new to TurboTax and still don't know exactly what can or cannot be done.  So I don't know if you can suppress penalties calculation in TurboTax.  Don't worry if you can't.  IRS should refund any penalties you overpay.

Answer to your 2nd question is NO if you don't live in a disaster area, but MAY BE if you live in a presidential declared disaster area as only underpayment for the 4th quarter could be waived.  Also see the next paragraph as you may be able to annualize your income and avoid all underpayment penalties.

Estimated taxes must be paid each quarter when there is insufficient withholding unless your income aren't earned evenly throughout the year.  See Form 2210 instruction, https://www.irs.gov/instructions/i2210#en_US_2022_publink[phone number removed], on Annualized Income Installment Method.  Otherwise, the 4 ES payments should be paid evenly.

P.S.  Just saw your additional post.  I think I have answered most of your questions above.  Since you now indicated you live in a presidential declared disaster area, Yes, the 2023 Q1, Q2 and Q3 ES payments are not due until Oct 16.  You can go to the IRS website I gave above to make those payments.  But bear in mind that those are for 2023 taxes.

[beginer1]

Thank you for the reply! Sorry I forgot to mention I also lived in the disaster area.

To make a 2022 Q4 ES payment today, you should click on this link, https://www.irs.gov/payments, and follow the instructions. 

But I cannot find entry for Q4 2022 1040es. All listed approaches directs me to year 2023 when I select form 1040es.

[guywong]

In that case, I'm afraid you will have to do it the old fashion way by mailing a check.  🙂

https://www.irs.gov/pub/irs-prior/f1040es--2022.pdf

Go to this link above, print out the 2022 4th quarter voucher on page 9 and mail it with your personal check to the IRS, using the address  shown on page 5,  P.O. Box 802502, Cincinnati, OH [removed] if you live in Calif.  Do not put your SSN on the check even though that's an IRS suggestion, for privacy reason.  Do not use a money order or bank cashier check because you may need to produce a copy of the front and back of your cancelled check to the IRS later if they replace the payment.  Do mail the check inside a post office and not a blue box on the street corner due to potential mail theft.

If you live in Calif and owe Calif income tax, do the same with a 4th quarter CA Form 540ES voucher.  Go to https://www.ftb.ca.gov/forms/2022/2022-540-es.pdf

[VolvoGirl]

You don't pay the 2022 4th qtr Estimate now.  Just file and pay the  tax due.  The IRS will know you are extended to Oct. 16, 2023.

[guywong]

I don't see why one who lives in a presidential declared disaster area and qualifies for the Oct 16, 2023 filing and payment delay would not pay 2022 Q4 ES now, as the IRS will consider any 2022 Q4 ES Payments made by Oct 16 to be timely paid.  Doing so will minimize the tax penalties.

Because TurboTax hasn't made any adjustments for this disaster relief extension, the Q4 ES Payment should be entered into TurboTax as if it was paid on Jan 17, 2023 (the original due date) to correct this inadequacy of TurboTax.  It's completely legit.

[duhmel]

I've started my 2023 taxes.  I live in California (disaster area) and did not pay my estimated tax until October 2023.  Turbotax shows a penalty.  Should I just backdate my filing date in TurboTax to April 15, 2023?

[guywong]

I would.  I don't see any harm in backdating the 2023 ES payments in TurboTax as the IRS is supposed to treat all ES payments paid by November 16,  2023 for those affected as timely.  I believe the IRS will refund any late payment penalty calculated by any tax software and paid by the taxpayer.  So no harm in backdating in this situation.

[DaveF1006]

The only risk in backdating like you suggest is if the payment dates are discussed during a routine audit.  If you have an IRS examiner that likes to stick to the details, then this might become a contentious issue.

@duhmel @guywong

[guywong]

@DaveF1006  I believe using an earlier date for 2023 estimated taxes under the circumstances mentioned by the questioner complies with the spirit of the law and the questioner can safely sign the 1040 that the tax return was correct and complete to the best of his/her knowledge and belief.

One of the first things most IRS agents request during an examination is a copy of the taxpayer's paper copy of the tax return as all the agents have is an electronic copy.  The paper copy of the 1040 does not show the date of the ES tax payments unless a 2210 is included.  But no 2210 should be prepared with the 1040 under this circumstance.  That is because, based on the question asked, the ES payments were made timely.  As a result, no underpayment penalties were due and, therefore, there is no legal requirement for the taxpayer to attach a Form 2210.

The backdating in this case is not to circumvent the tax law but to circumvent an error by TurboTax.

Until my recent retirement, in my almost 5 decades of practice before the IRS, I have never had any IRS agent asking for the ES taxes payment dates.  Even if the dates of the payments were discussed during an examination, the questioner can safely tell the agent the ES taxes were paid in mid-October 2023.  I simply don't see any risk here.

I would love to read any authoritative literature supporting your position.

[DaveF1006]

I just rendered an opinion regarding your opinion on backdating estimated payment dates and the possible risk for doing so. The risk may be minimal or non-existent but a possible risk nevertheless. There is no authoritative position on this.

On the other hand, since you were an ex-IRS employee, do you have any authoritative citation reporting your position? If so, it would take precedent to my position. I do believe though this is a gray area that is open to interpretation, at best.

@guywong