Underpayment Tax Penalty

[shuttle1421]

Is TurboTax 2023 Premier currently accurate with regards to calculating the under-payment penalty? 

My total of withholding and estimated tax payments meets both the requirements for no penalty. However, the program is saying I owe a penalty.

I advanced paid more than 90% of the 2023 tax owed and in my case 110% of my tax for 2022.

Why is the program saying I owe a penalty? I can get around it if I fill out form 2210 with my variable earnings for 2023 but I should not have to do this given the fact that I meet the two general requirements for no penalty.

What is the issue??? 

[Mike9241]

25% of withholding is deemed paid each period but by checking box D on the 2210 you can use actual withholding for each period.

timely estimates are based on the dates you entered in the tax payments worksheet,  bad dates or late payments would result in penalties being calculated.  you need to check those dates and review the 2210 to see what periods are subject to penalty and what's being used for tax payments. This forum has no access to your return. 

[shuttle1421]

That's all well and good but why doesn't TurboTax just recognize the IRS rule regarding paying at least 90% of the tax due for 2023, which I did, or paying 110% of the tax for 2022 which I did?????? That would eliminate any need to use or review Form 2210.

[shuttle1421]

I would like to have someone from TurboTax answer my original question, please

[JohnB5677]

It's difficult to tell without seeing your tax return, but I do have a couple of questions.

• Were all of your taxes paid from withholdings from wages?
• Was some of the money you earned from a business or outside source?
• Did you have irregular peaks and valise in your income?
• Did you pay quarterly estimated taxes?
• Did you make a large payment at the end of the year?

The IRS says "The Underpayment of Estimated Tax by Individuals Penalty applies to individuals, estates and trusts if you don't pay enough estimated tax on your income or you pay it late. The penalty may apply even if we owe you a refund."

Underpayment of Estimated Tax by Individuals Penalty

Tax Underpayment Penalty: What It Is, Examples

I know this may not completely answer your question.  Please contact us again and provide some additional details.

[shuttle1421]

Let me boil my question down to this rather that going on about this.

Why doesn't the Turbo Tax program just use the IRS safe harbor rules and check to see if a penalty is required?

If any of the three rules apply then then is no penalty and no need to go through the Form 2210

[JohnB5677]

There is a qualifier that the IRS stated.

My question is " Did you make a late payment of estimated taxes?"  

If you made a big payment late last year or this year it may still generate a penalty.

The IRS says "The Underpayment of Estimated Tax by Individuals Penalty applies to individuals, estates and trusts

"if you don't pay enough estimated tax on your income or you pay it late. The penalty may apply even if we owe you a refund."

If you did pay late, TurboTax 's calculation is correct

If you did make all of your quarterly payment in a timely manner, Then TurboTax has a problem to investigate.

In that case we can request that you to send us a sanitized version of your tax return (by issuing a token).

If you've confirmed that you made timely payment please use @JohnB5677 and I will provide you with directions to start an investigation.

[shuttle1421]

Here is a direct excerpt from the IRS publication:

Penalty for underpayment of estimated tax

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid 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. There are special rules for farmers, fishermen, and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

There is no qualifier to the Safe Harbor rules. My question still stands - why doe the TurboTax program not use the Safe Habor rules to determine if a penalty is required or not???????????????????????

I again show the Safe Harbor rules - I exceed the 90% rule and in my case the 110% rule:

Estimated tax payment safe harbor details

The safe harbor estimated tax has three components, which we’ll outline here.

Generally, an underpayment penalty can be avoided if you use the safe harbor rule for payments described below. The IRS will not charge you an underpayment penalty if:

• You pay at least 90% of the tax you owe for the current year, or 100% of the tax you owed for the previous tax year, or
• You owe less than $1,000 in tax after subtracting withholdings and credits

This rule is altered slightly for high-income taxpayers. If the Adjusted Gross Income (AGI) on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

[AmyC]

When you go to Other Tax Situations and select Underpayment penalties, the program asks, Farmer/Fishermen, then it asks about year before - filing status, income, and tax liability. The program will then declare no penalty if the safe harbor is met. It is only if you don't meet them that the program even continues to ask more questions. 

[DB991]

@AmyC  this was very helpful. Thank you! 

I have to agree with @shuttle1421 that TT should already have known this since it imported last year's 1040.  I too met the 110% rule and paid quarterly estimated tax on time, yet TT still said I owed a penalty.    I find it bothersome that TT's question regarding 2022 tax liability references form 2210 line 4!   Most people don't have form 2210.   The correct reference for prior year's tax liability is form 1040 line 24.   Once I updated "other tax situations" with my 2022 tax liability, the erroneous underpayment claim went away.

I used a competing tax prep software for years and this is my first time using TT.   The other software had a somewhat less friendly user interface, but it wouldn't make such a silly error.   Based on this experience, my confidence in TT is not strong.

[1cjones1]

I too had this same issue. TT said I owed a penalty even though I am covered by the safe-harbor rules. Although I paid less than 90% of the current year's tax liability, I should have been covered by the fact that I paid at least 100% of 2022's liability (the 110% rule doesn't apply to me). 

TT didn't even ask me or take into consideration what my tax liability was in 2022....

[dhomrigh]

It appears to me that only withholding, not estimated taxes, are used to determine if safe harbor is met?  This is very surprising to me, but it seems to be the case (line 6 in 2210).  I'm very surprised that estimated taxes don't count towards safe harbor.  If someone else feels differently and can point me in a helpful direction, I'd love to hear it.

Darren

[MonikaK1]

If TurboTax is showing an underpayment penalty on your return, visit or revisit the Underpayment Penalty section under Other Tax Situations and answer the interview questions. The penalty calculation may change based on your answers, including information about when your withholding was applied. In addition, if you believe you qualify for a waiver of the penalty, you can request a waiver in that section.

The IRS may reduce an underpayment penalty if any of the following apply:

• You or your spouse (if you file a joint return) retired in the past 2 years after reaching age 62 or became disabled and you had reasonable cause to underpay or pay your estimated tax late. See Waiver of Penalty in Instructions for Form 2210PDF.
• You had most of your income tax withheld early in the year instead of spreading it equally through the year. 
• Your income varies during the year. Complete Form 2210, Schedule AI, Annualized Income Installment Method PDF(found within the form).

The penalty for underpayment of estimated tax can also be removed to the extent that the underpayment is the result of a casualty, local disaster, or other unusual circumstance such that it would not be fair to impose the penalty.

See here for information about different TurboTax tools you can use to calculate withholding and estimated taxes

[DB991]

I agree that the way 2210 reads that line 6 defines the safe harbor cut off.  But something more is happening in the background that seems to override the first pass underpayment claim.  I am in the 110% safe harbor camp.  My W-2 withholding for 2023 was less than 50% of my estimated tax liability, so I made 4 quarterly payments to meet the 110% level.   Yet, even with this info TT showed I owed a penalty.  

But when I went to "Other Tax Situations" and opened the "Underpayment penalties", I was able to answer a couple of questions and then enter my 2022 tax liability.  This is the info that I was very surprised (and disappointed) that TT didn't already import nor did ask for this information before declaring I owed a penalty.

After I did this TT then said I owe no penalty.

[deci37]

Is there a bug in TT? I also have an underpayment penalty. But I have done the math from last year, and I 100% paid what I owed on time. Had the correct amount withheld from my paychecks by my employer and paid the balance due when it was due. Note, taxes last year were due April 18th, not the 15th because 1) a weekend, 2) DC's emancipation day holiday. The only thing I can think of is that TT calculating a penalty based on an April 15, 2023 filing due date.

Also the information in the software to understand why one might be receiving this penalty is completely lacking, its a total black box.