During 2000, we have noticed a significant increase in the number of instances where the IRS is imposing an underpayment penalty. It is important that you not only file your return in a timely manner, but that you pay on time. In general, you must pay during the year, not the following year when you file your return.
It is also very important to note that extensions require FULL payment with the extension. The rules below regarding exceptions to the underpayment penalty only apply when payment is made in full by April 15th.
If you did not pay enough tax either through withholding or by making estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty. Generally, you will not have to pay a penalty for 2000 if any of the following situations apply to you.
IRS can figure the penalty for you. If you think you owe the penalty but you do not want to figure it yourself when you file your tax return, you may not have to. Generally, the IRS will figure the penalty for you and send you a bill. However, you must complete Form 2210 and file it with your return if you check any of the boxes in Part I of the form. See Reasons for filing later in this section.
In general, you may owe a penalty for 2000 if the total of your withholding and estimated tax payments did not equal at least the smaller of:
Special rules for certain individuals. There are special rules for farmers and fishermen and for certain higher income taxpayers.
Farmers and fishermen. If at least two-thirds of your gross income for 1999 or 2000 is from farming or fishing, substitute 66 2/3% for 90% in (1) above.
Higher income taxpayers. If less than two-thirds of your gross income for 1999 and 2000 is from farming or fishing and your adjusted gross income (AGI) for 1999 was more than $150,000 ($75,000 if your filing status is married filing a separate return in 2000), substitute 106% for 100% in (2) above.
Penalty figured for each period. Because the penalty is figured separately for each payment period, you may owe a penalty for an earlier payment period even if you later paid enough to make up the underpayment. If you did not pay enough tax by the due date of each of the payment periods, you may owe a penalty even if you are due a refund when you file your income tax return.
Minimum required each period. You will owe a penalty for any 2000 payment period for which your estimated tax payment plus your withholding for the period and overpayments for previous periods was less than the smaller of:
Note. If you are subject to the rule for higher income taxpayers, discussed earlier, substitute 26.5% for 25% in (2) above.
When penalty is charged. If you miss a payment or you paid less than the minimum required in a period, you may be charged an underpayment penalty from the date the amount was due to the date the payment is made.
1999 separate returns and 2000 joint return. If you file a joint return with your spouse for 2000, but you filed separate returns for 1999, your 1999 tax is the total of the tax shown on your separate returns. You filed a separate return for 1999 if you filed as single, head of household, or married filing separately.
1999 joint return and 2000 separate returns. If you file a separate return for 2000, but you filed a joint return with your spouse for 1999, your 1999 tax is your share of the tax on the joint return. You filed a separate return for 2000 if you filed as single, head of household, or married filing separately.
Form 2210. In most cases, you do not need to file Form 2210. The IRS will figure the penalty for you and send you a bill. If you want to figure your penalty, complete Part I, Part II, and either Part III or Part IV of Form 2210. Do not file Form 2210 unless you must file it, as explained later under Reasons for filing. If you use Form 2210, you cannot file Form 1040EZ.
Reasons for filing. You may be able to lower or eliminate your penalty if you file Form 2210. You must file Form 2210 with your return if any of the following applies.
Annualized income installment method. If you did not receive your income evenly throughout the year (for example, your income from a repair shop you operated was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Under this method, your required installment for one or more payment periods may be less than one-fourth of your required annual payment.
To figure your underpayment using this method, complete Schedule AI of Form 2210. Also check the box on line 1b in Part I of Form 2210. You must file the form and Schedule AI with your return.
Actual withholding method. Instead of using one-fourth of your withholding to figure your payments, you can choose to establish how much was actually withheld by the due dates and use those amounts. You can make this choice separately for the tax withheld from your wages and for all other withholding.
Using your actual withholding may result in a smaller penalty if most of your withholding occurred early in the year.
If you use your actual withholding, you must check the box on line 1c, Part I of the Form 2210. Complete Form 2210 and file it with your return.
Short method for figuring the penalty. You may be able to use the short method in Part III of Form 2210 to figure your penalty for underpayment of estimated tax. If you qualify to use this method, it will result in the same penalty amount as the regular method, but with fewer computations.
You can use the short method only if you meet one of the following requirements.
Note. If any payment was made earlier than the due date, you can use the short method, but using it may cause you to pay a larger penalty than using the regular method. If the payment was only a few days early, the difference is likely to be small.
If you do not meet either requirement, figure your penalty using the regular method in Part IV, Form 2210.
Note. If you use the short method in Part III, you cannot use the annualized income installment method or the actual withholding method.
Generally, you do not have to pay an underpayment penalty if either of the following conditions apply:
You do not owe a penalty if the total tax shown on your return minus the amount you paid through withholding (including excess social security and railroad retirement tax withholding) is less than $1,000.
Total tax for 2000. For 2000, your total tax on Form 1040 is the amount on line 56 reduced by the total of the following seven amounts.
Your total tax on Form 1040A for 2000 is the amount on line 34 minus the amount on lines 37a and 38. Your total tax on Form 1040EZ is the amount on line 10 minus the amount on line 8a.
You do not owe a penalty if you had no tax liability last year and you were a U.S. citizen or resident for the whole year. For this rule to apply, your tax year must have included all 12 months of the year.
You had no tax liability for 1999 if your total tax was zero or you did not need to file an income tax return.
Total tax for 1999. For 1999, your total tax on Form 1040 is the amount on line 56 reduced by the total of the following seven amounts.
Your total tax on Form 1040A is the amount on line 34 minus the amount on lines 37a and 38. Your total tax on Form 1040EZ is the amount on line 10 minus the amount on line 8a.
The IRS can waive the penalty for underpayment if:
To claim a waiver, follow the procedures explained in the instructions for Form 2210.
Contact us for more information regarding underpayment of taxes for form 1040 - Individual Income Taxes.
© Copyright 2000 Raymond S. Kulzick. All rights reserved. 001124.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.