tax refund but with penalty?

[henrysf]

I am working on my 2023 federal and California tax return, and I am also most done.  So far, I am getting about $2000 federal refund and $3000 California refund; however, TurboTax said I need to pay a $2 penalty.  Is that possible?  I thought I only need to pay penalty if I own tax, right?

I paid about $8000 estimated tax as I realized that I would owe tax otherwise, but I followed the October deadline for first 3 quarters (I live in Alameda country, which is in natural disaster area, and deadline for estimated tax were pushed to October).  I filed a waiver given I lived in Alameda, but I would just pay $2 if IRS doesn't agree.

[MonikaK1 · Accepted solution]

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.

If you have taxes due with your return, a penalty for underpayment of estimated taxes is calculated by TurboTax, and you paid estimated tax within the extended time period for California disasters:

Visit or revisit the Other Tax Situations section and review the Underpayment Penalty information to confirm it is correct. Go through the interview and follow the prompts; when you get to the Penalty Waivers screen, answer "yes" if you qualify for a disaster exception, then "yes" at the next screen to request a waiver of the penalty, in all or part. Enter the reason in the field provided.

If you live in a federally declared disaster area and met the special filing and payment deadlines for that disaster, you qualify for an automatic underpayment penalty waiver. Even if the penalty is calculated on the return, the IRS should not charge the penalty. 

See here for the IRS requirements for the California disasters for 2023.

If you get a notice from the IRS proposing to assess the penalty, see this IRS webpage for guidelines and next steps.

Because the Federal and state extended filing deadlines are available only for individuals living in areas impacted by official disaster declarations during specified dates, the deadlines themselves aren't updated in the software. The tax agencies made an administrative decision not to impose the penalties, but since the law itself didn't change, tax software including TurboTax still calculates the penalties. 

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers do not need to contact the agency to get this relief. However, if an affected 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 falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

See here for related information from the California Franchise Tax Board.