Should I Pay Underpayment Penalty Now or Wait for IRS Letter?

[timbukktoo]

TurboTax has calculated that I owe an ‘underpayment of my estimated taxes’ penalty for 2022. It gives me the option of paying the penalty right now (with my 2022 tax return) or waiting for the IRS to send me a bill in the mail. I am going to pay the tax bill due in full by the April deadline. I am also planning to request a First Time Abate on this underpayment penalty as I have a clean tax compliance record over the past several years.

I have seen commenters mention that you have better odds on succeeding with the FTA request if you don't pay the IRS penalty up front. Is this true, and why is that?

If I were to not pay the penalty immediately and wait for the letter from the IRS, I am concerned that this will subject me to more interest $$ than if I were to have paid right away the amount TurboTax calculated. However, according to TurboTax, once I receive the IRS bill, if I pay the penalty within the time specified on the bill, there will be no interest charged. Is this correct?

So there shouldn’t be a big difference in what I owe in penalty/interest according to TurboTax (calculated today) vs IRS (calculated whenever they get around to it and bill me)? Note: my ‘penalty payment after receiving the bill’ scenario is assuming I was denied by the IRS in my FTA request.

[JosephS1 · Accepted solution]

It is suggested you pay the underpayment penalty with the return AND request an abatement for cause.  If the abatement request is successful the IRS will refund the penalty.  If not there is no additional interest to be assessed, provided the underpayment penalty is based on an underpayment of less than 25% of the tax owed.

The IRS may provide administrative relief from a penalty that would otherwise be applicable under its First Time Penalty Abatement policy.

You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due under the Service's First Time Penalty Abatement policy if the following are true:

• You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
• You filed all currently required returns or filed an extension of time to file.
• You have paid, or arranged to pay, any tax due.

The failure-to-pay penalty will continue to accrue, until the tax is paid in full. It may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the Service's first time penalty abatement policy.

Other administrative relief: If you received incorrect oral advice from the IRS, you may qualify for administrative relief.

The link below is from the IRS web site for Penalty Relief.

Penalty Relief per the IRS

@timbukktoo 

[timbukktoo]

Thanks for your quick reply Joseph. I don’t have rationale for an abatement for cause and that’s why I am planning to request the first time abatement.

You indicate I should pay the penalty with my taxes. But this goes against others views (from searching this community) who have suggested to wait for the IRS penalty bill and then request abatement. I am unclear of which option is best and why.

You mention: “The failure-to-pay penalty will continue to accrue, until the tax is paid in full. It may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the Service's first time penalty abatement policy.” My intention is to pay the tax in full by the April deadline. So your comment above means there is no interest charged on the penalty itself, the interest is only based on the tax due?

[JosephS1]

Yes, as long as you pay the tax when due then any interest assessed, should the penalty not be abated, will be on the penalty itself.  If the penalty as computed in your case is minuscule, then by all means wait for the IRS to bill you.  I am basing my opinion on a large penalty and on a personal editorial note if I can keep the government from getting any more of my money than is required I do so.  I do hope you succeed in your abatement request.

@timbukktoo 

[timbukktoo]

So you are saying there is indeed interest on the penalty amount itself. The penalty is actually over $900. So you would pay it with the tax return vs wait? 

 (note: still not sure why others recommended waiting for the IRS bill as if that would increase the probability of success for a FTA request.  some others mention that one is likely to get an IRS bill/letter even if you pay the penalty with your tax return because the precise penalty/interest calculation by TurboTax is usually off a bit.)

[fanfare]

Your estimated tax penalty is added to the amount you owe

Therefor if you fail to pay,  you will pay interest on your tax balance and the estimated tax penalty

If you don't pay the penalty, you have a shortfall and you will be paying interest on the estimated tax penalty

If you  pay on time, your penalty is fixed.

IRS cannot abate interest.

[HopeS]

The IRS charges interest on penalties for late filing, late paying, and substantially underestimating the tax you owe. The interest and penalty will continue to accrue until the payment is made in full. Therefore, it is best to pay sooner rather than later to minimize the amount of penalty and interest.

Some penalty abatement can be done by calling the IRS at 1800-829-1040. You can also file Form 843 (Claim for Refund and Request for Abatement) once the payment is made in full. 

See additional information in the link below:

Click on Form 843

Form 843

@timbukktoo