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Underpayment Penalties

What can anyone tell me about how the penalty for not having paid in 90% of tax works (as distinct from penalty for not paying quarterly estimated tax payments)?   I assume the penalty is applied if 90% isn't paid in by December 31 (rather than tax filing deadline.)  I appreciate any clarification.

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7 Replies 7
Level 15

Have you read through the instructions to the form?

2019 Instructions for Form 2210 (irs.gov)

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Level 11

Or are you asking about the late payment penalty that starts with the return due date when an extension is filed but without enough tax paid with it?

I am referring to the penalty when the total of withholding and estimated payments are not paid in by end of year (or filing date?)  I have looked at the form instructions and they seem a little vague in that they do not state that they must be paid by year end, filing time, or January 15...? (since this is the final quarterly estimated due date for the prior year...?) 

Is the 90% rule the one you are referring to for not enough paid in at filing time? If so that answers my question.  But even the instructions can be very confusing - bottom line for me is - should I tell my client to have at least 90% paid in by Dec 31, or when...

I appreciate all help and answers.

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Level 13

"I have looked at the form instructions and they seem a little vague"

By withholding = from Payroll on a paycheck dated in that tax year.

By estimates = by the final due date for estimates for that tax year, such as Jan 15 is for the prior tax year.

You are asking about Safe Harbor. There are three tests and you need to know what applies: 90%, 100% and 110%. That's why you read the IRS reference materials.

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"Level Up" is a gaming function, not a real life function.
Level 15

@johnicahorton wrote:

... I have looked at the form instructions and they seem a little vague in that they do not state that they must be paid by year end, filing time, or January 15...? (since this is the final quarterly estimated due date for the prior year...?)...


There is no ambiguity in these rules.  If they seem vague to you, you should read them a couple more times (and use materials from other reliable sources) until you understand them.  The responses above should, hopefully, set you on a more solid footing.

You must also remember that each quarter's ES-tax payment must be made on a timely basis.  Late payment for each quarter will continue to accrue penalties (cumulatively) until that underpayment is fully settled.  In other words, you could have a client who is due a refund subject to underpayment of ES-tax penalty because the required quarterly ES-tax payments were made after the respective due dates.

There is also an exception for the 4th quarter's ES-tax payment; that quarter's payment does not need to be made if the balance due is paid with a return to be filed by Jan 31.

Finally, ES-tax penalty may sometimes be mitigated by annualization.  This is particularly useful if you have clients who do not receive their income ratably over the year.  This could be because they received an extraordinarily large amount of income from bonus, stock options, trading, etc. in certain quarter(s).  The computation is relatively complicated and this is where you would charge your client for the cost of running those calculations.

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Still an AllStar
Level 13

@johnicahorton wrote:

What can anyone tell me about how the penalty for not having paid in 90% of tax works (as distinct from penalty for not paying quarterly estimated tax payments)? 


 

It is not distinct from the estimated tax penalty.  They are the same thing.

If a taxpayer did not pay at least 90% of what they owe (see note below), they SHOULD have made Estimated Tax Payments (or had higher withholding).  So that is the Underpayment of Estimated Tax Penalty.

As you read the instructions, it is more complicated than that.  Factors include if you owe more than $1000, what last year's tax was, and higher income taxpayers may need to pay more than 90%.  But the bottom line is that you are referring to ONE penalty, not two different ones.

Level 15

Pull Form 2210, and walk (very carefully...) thru page 3 & 4.  It should clarify things much better than words can.  It is actually very logical.

Another approach is to use a dummy client, make it have a liability, then play with the numbers coming from withholding and from estimates.  Change the dates on the estimates (make some late, or even zero) and review the F 2210 page 3 & 4 and worksheets until you understand the impact.

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