My estimated taxes were fully paid in December 2023. The amount paid was exactly equal to the tax due and paid in 2022, and was 143% of the tax due for 2023. Turbotax estimated a penalty for underpayment in 2023. The IRS simply refunded what Turbotax computed which included the penalty.
Both IRS topic 306 and turbotax guideline: "https://turbotax.intuit.com/tax-tips/irs-letters-and-notices/guide-to-irs-tax-penalties-how-to-avoid-or-reduce-them/L7Unetw5B" state the following regarding avoiding penalty for underpayment:
Penalty for underpayment of estimated tax:
most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. "
How can I recover the penalty paid?
"My estimated taxes were fully paid in December 2023. The amount paid was exactly equal to the tax due and paid in 2022"
TurboTax calculated the penalty correctly. Because income is by default treated as received equally throughout the year and the US tax system is pay as you go, making a single estimated tax payment in December to cover your entire year's tax liability will not avoid underpayment penalties for tax quarters 1 through 3. It will only eliminate the underpayment penalty for Q4.
You might be able to reduce the penalties for Q1 through Q3 by annualizing income on Schedule AI of Form 2210. Unless all of your income was received in Q4, you'll still have underpayment penalties for earlier quarters, but they might be reduced. However, if the bulk of your income was received in Q1, annualizing income will instead increase the total penalty.
I can't be sure what happened with TurboTax's calculation of the penalty, but didn't you just say:
"The IRS simply refunded what TurboTax computed which included the penalty." So as I understand that, you did get the interest and penalty back.
If you have further details, please contact us again.
Thanks for your reply. No I did not get the penalty amount back.
The Turbotax requested refund on line 35a was reduced by the line 38 estimated penalty being subtracted from the amount overpaid on line 34. I believe the penalty estimate was in error. What is the best way to rectify this - file an amended return, or something else?
Thanks,
alanleigh
Yes, you may want to Amend your return to re-enter your 2023 Estimated Tax Payments. If you only entered three payments (instead of four), this may be why TurboTax thought you were short on tax payments.
Make an entry into each of the four areas; as long as the total is the correct amount you paid for 2023, this should correct your underpayment penalty error.
"My estimated taxes were fully paid in December 2023. The amount paid was exactly equal to the tax due and paid in 2022"
TurboTax calculated the penalty correctly. Because income is by default treated as received equally throughout the year and the US tax system is pay as you go, making a single estimated tax payment in December to cover your entire year's tax liability will not avoid underpayment penalties for tax quarters 1 through 3. It will only eliminate the underpayment penalty for Q4.
You might be able to reduce the penalties for Q1 through Q3 by annualizing income on Schedule AI of Form 2210. Unless all of your income was received in Q4, you'll still have underpayment penalties for earlier quarters, but they might be reduced. However, if the bulk of your income was received in Q1, annualizing income will instead increase the total penalty.