Tax Penalty line 38 - 1040SR

[HGE747]

I already e-filed my 2024 1040-SR. After reviewing my printed copy of the 1040-SR I discovered to my surprise a Penalty/Interest charge on my 2024 Federal Tax Return Summary. While preparing my 2024 taxes on TurboTax I was not informed or directed that there was an issue with an estimated tax penalty. After some research I now suspect the reason could be because my quarterly estimated tax distributions were uneven. I rolled over a substantial IRA to a Roth IRA in the last week of 2024. Therefore, I increased the last quarter estimated taxes accordingly. Is there anyway to correct this penalty/interest charge. Turbo tax already paid the penalty from my refund. Thanks

[VolvoGirl]

No, but it is an estimated amount.  The IRS might reduce it and increase your refund. 

[SharonD007]

You can contact the IRS to request a one-time abatement of your underpayment penalty. For individual tax returns, call 1-800-829-1040, 7 AM - 7 PM Monday through Friday local time.

For more information, refer to the TurboTax help article Guide to IRS Tax Penalties: How to Avoid or Reduce Them.

[HGE747]

Do you know when the IRS determines the finalized amount? Do I get a notification from them? Thanks

[JohnB5677]

Yes, if you've underpaid your taxes, you will get an IRS tax notice, but the IRS works at it's own pace.  You can receive the notice at any time.

The IRS provide guidance on the Underpayment of estimated tax by individuals penalty.

The underpayment penalty will be assessed if any of these apply:

• "If you don’t pay enough tax through withholding and estimated tax payments, you may have to pay a penalty."
• "You also may have to pay a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return."

To avoid the under payment penalty:

• The amount you owe is less than $1,000, after subtracting withholding and refundable credits.
• You paid 90% of the tax that you owed for the current year.
• You paid 100% of the previous year tax, (110% for higher incomes).
• If your previous year's adjusted gross income was more than $150,000 you will have to pay in 110% of your previous year's taxes to satisfy the "safe-harbor" requirement.

"Typically, underpayment penalties are charge a percentage of the underpaid amount, and they're capped at 25%. 

Underpaid taxes also accrue interest at a rate that the IRS sets annually."

To avoid this situation it is recommended that you adjust your W-4 with your employer or pay estimated taxes.

[SteamTrain]

After the IRS send whatever refund they decide is proper......if the amount they send still indicates they retained the penalty?   Then:

Sometime in (say) May, you could prepare an Amended tax return to see if you can get the penalty partially-or-all refunded......BUT...that is not worth the effort if your penalty was less than ~$50 or so....because it's a lot of work on your part. 

__________________

Do Not start an Amended tax return now...wait until you see what the IRS does...

To amend to see if you could change it (Wait until May), you'd start an Amended Federal tax return.  Then you'd go to the "Other Tax Situations " page and start in on the Underpayment Penalty section.   In there you will need to delineate all Your income, wages, 1099-R, SS, dividends, Interest, Cap gains, deductions, credits for estimated payments, withholding etc...all delineated by quarter...and the "quarters" are uneven and are 3mos, 2mos 3mos, 4mos.  That will fill out an "Annualized Income" form 2210AI, and the associated 1040X for you to e-file. 

(might need to Amend state too....but if you didn't have a penalty there, it probably wouldn't be needed)

So you need all your monthly statements and perhaps a spreadsheet.  TTX tries to lead you thru it, but it's still a bit complicated.  You can go thru it several times as you see what details you need to provide and modify your responses appropriately.

But like I said, if the penalty was small, don't bother...and don't be tempted to touch your tax file for a couple months anyhow.

[stands]

I was assessed a penalty (1040-SR line 38) of $436, even though I paid quarterly and overpaid for the year by over $8000. That is not fair. Did I overlook something in TT? Can this be corrected? I am self-employed and my income is not steady. The "safe harbor" rule I've heard about is unrealistic, saying my income has to be the same or higher every year or I have to pay a penalty. My estimated payments are based on my actual income in a quarter.

Thank you.

Stan Hendryx

Sunnyvale, California

[HGE747]

Your situation sounds exactly similar to mine. I’m very dissatisfied in TT for not alerting me of a pending interest/penalty charge while going through the step-by-step process. I only found out I had a problem until after I transmitted my return to the IRS. Like you, it’s hard for me to understand why this penalty was triggered when I actually overpaid my taxes for the year. Anyway, several TT community members gave me some suggestions.  Two of them resonated to me. First, “One Time Abatement” Form 843. Basically (forgiveness), this seems unlikely,  but maybe worth a try. Second, amend your return (Form 2210), which amounts to a total recalculation of your exact quarterly income. This would be a lot of work for me as a novice tax person but I’m still debating. I will decided to make my decision on what to do in May if anything. 

[VolvoGirl]

@stands    It is not about 2023 or not paying estimates. And the penalty is just an estimate so it is possible for the IRS to recalculate it and send you a refund or a bill for more.

If you get a penalty on 1040 line 38, 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

[DawnC]

Double check your entries, including the dates you entered for your estimated tax payments.  The IRS levies underpayment penalties if you don't withhold or pay enough tax on income received during each quarter.   Even if you paid your tax bill in full by the April deadline or are getting a refund, you may still get an underpayment penalty.   

Example from this TurboTax FAQ:  Taylor is self-employed and estimated next year's tax bill at $20,000. Rather than making 4 quarterly payments of $5,000 each, they chose to pay $500 in each of the first 3 quarters, and the remaining $18,500 in the fourth quarter.    When they filed, their actual tax bill came to $17,270 and they got a $2,730 refund. However, Taylor got hit with the underpayment penalty, because they underpaid their estimated tax in the first 3 quarters.    More on Underpayment Penalties; Topic 306.

To possibly reduce or eliminate your underpayment penalty, search for penalty and use the Jump to penalty link and go through the interview.