Abatement or waiver of underpayment penalty

[SecondCor521]

I am preparing a federal tax return for a family trust for the first time. I've just finished filling out a 2018 Form 1041. (The trust tax returns for 2017 were done by a local CPA firm.)

No withholding was done in 2018. I did a proforma return in December to see if an estimated tax payment would need to be made. My calculations at that time predicted taxes due of less than $1,000, so we did not make any estimated tax payment.

Because I had never done a 1041 before and because the trust has never had large attorney fees before, I did not understand that the attorney fees had to be allocated across the taxable and tax-exempt income. Once I made the allocation, it reduced the deductibility of the attorneys fees by about $5,000, which increased the tax liability of the trust.

It appears that the trust will owe $1,241 in federal income taxes, so none of the three safe harbors was met. Based on a SWAG at Form 2210, the underpayment penalty looks like it will be about $27 if we file in the next few days.

Questions:

1. If I don't request a waiver on behalf of the trust, it looks like we don't have to file Form 2210...is that right?
2. Is the IRS likely to catch the fact that an underpayment penalty may be due?
3. Is there any easy or simple way to request a waiver based on the facts above? I've read about first-time abatement...does that apply?
4. Is there any way I can request a waiver based on the fact that the 1041 instructions were not final until 1/17 and the Form 2210 instructions are still not final as of a day or two ago, plus the fact that the TCJA made an amendment to section 67 regarding deductions that could have affected the trust return?
5. I take it that "taxpayer mistake" isn't usually approved. Is that true in my case, or should I try to ask for mercy?

 

[kaneohe]

..............................


It appears that the trust will owe $1,241 in federal income taxes, so none of the three safe harbors was met. Based on a SWAG at Form 2210, the underpayment penalty looks like it will be about $27 if we file in the next few days.

..............................

Assuming the penalties are the same for trusts as for individuals (they use the same F2210?,it appears), you would pay 5% interest on the 241 excess over 1K safe harbor. For a full yr , that would be $12 and since the payments were due quarterly my SWAG is half of that or $6. Would you meet the (previous) 90% of this yr taxes safe harbor (now temp. lowered to 85% for 2018)
https://fairmark.com/forum/topic/form-2210-waiver-of-penalty-for-2018/

My guess if the SWAG is true is that IRS has bigger fish to catch.

 

[SecondCor521]

Assuming the penalties are the same for trusts as for individuals (they use the same F2210?,it appears), you would pay 5% interest on the 241 excess over 1K safe harbor. For a full yr , that would be $12 and since the payments were due quarterly my SWAG is half of that or $6. Would you meet the (previous) 90% of this yr taxes safe harbor (now temp. lowered to 85% for 2018)
https://fairmark.com/forum/topic/form-2210-waiver-of-penalty-for-2018/

My guess if the SWAG is true is that IRS has bigger fish to catch.

We wouldn't meet the 85% safe harbor because we had $0 withheld from the trust in 2018.

I agree it seems trusts use the same Form 2210.

I'm leaning towards filing the trust tax return showing the $1,241 owing, leaving line 27 (estimated tax penalty) blank, *not* filing Form 2210, and see what the IRS does. And then if they send us a bill for $6 or $27 or whatever, we'll just pay that.

Thanks for the reply.

 

[cathy63]

Is this trust the result of an estate where the decedent died in 2017? If so, I don't think you owe any penalties.

Estates and trusts. No penalty applies to either of the following.
• A decedent's estate for any tax year ending before the date that is
2 years after the decedent's death.
• A trust that was treated as owned by the decedent if the trust will
receive the residue of the decedent's estate under the will (or if no
will is admitted to probate, the trust primarily responsible for paying
debts, taxes, and expenses of administration) for any tax year
ending before the date that is 2 years after the decedent's death.

If you do owe penalties, then the IRS will calculate them and send you a bill whether or not you file form 2210. I believe they'll also tack interest onto the penalty, so if they don't get around to figuring it until October, you'll pay 9 months of interest.

 

[ocean view]

The penalty amounts are so small, do you really want to make a tax payment now and then wait for a bill so you can make another immaterial payment in the future, while interest continues to accrue?

I’d suggest you just round your payment up to $300 now, let the IRS figure out the penalty & interest. They’ll automatically send you a notice to explain the penalty & interest charge and a refund of any over payment.

 

[SecondCor521]

@cathy63, the decedent (my Mom) died in 2016, so unfortunately that rule doesn't apply.

Is there any chance the IRS won't catch this, or is this an automated thing? I guess I'm wondering if it is better to draw attention to it by filing Form 2210, checking box A or B and asking for a waiver with the return.

Interest on the underpayment penalty should only be a few dollars.

One difficulty is I'm not sure how to calculate the penalty on Form 2210. There are multiple difficulties: I'm not sure what to put on line 8 for a trust (it seems like last year's federal taxes due - Form 1041 Schedule G line 7). I'm also not sure how to calculate number of days paid before 4/15 on line 16 - is that based on the day we mail the check? I think so. Finally, I calculated $27 and someone else calculated $5, so I wonder if I'm doing it right. I think I am - the penalty and interest calculations are on the total amount owed, not just the amount of underpayment, right?

@ocean view, I tend to get caught up in minutiae often. It's most of what makes me so charming and a hit with the ladies.

 

[cathy63]

For personal returns, determining that you underpaid is very much an automatic calculation. Filing or not filing form 2210 doesn't affect whether the IRS will notice that you owe the penalty. They will definitely notice and bill you.

For trust returns, I just don't know enough to say whether they will catch it or not, but I think it's highly likely that they will.

When I do the math, I also come up with a number close to $27, so yes, I think that's right. The penalty is figured on the entire amount of the underpayment, which is the smaller of the amount of tax paid in 2017 (sum of Schedule G lines 4 to 7) or 90% of the amount you owe in 2018.

If it were me, I'd file form 2210, calculate the penalty to the best of my ability, round up by about $5 and let the IRS issue a refund for the overpayment. I would rather have them owe me a few dollars than have me owe them a few dollars, but that's just my own quirk.

 

[SecondCor521]

Thanks. A closer review of the instructions on Form 2210 indicates that even if I calculate and include and pay the penalty, I'm not supposed to file Form 2210. I'm not checking any of the A-E boxes. Weird, but I'll follow their rules.

I recalculated the penalty and got $15 this time using part III:

10. $597 (2017 1041 line G-7)
11, 12, 13. $0 (No estimated or withholding occurred)
14. $597
15. $22
16. $7 (Assuming we file on 2/1/19, which is 73 days before 4/15/19)
17. $15

I think I did that right; it's less than the $27 because the trust's tax owed this year is higher than the tax paid last year.

I like the idea of rounding up, and I'm sure my Dad would like that too. Current plan is to add a rounded up penalty to the return, not file 2210 (but keep it for our records), and hopefully get a check from the IRS for $5 in the fall.

 

[pb4uski]

Just wondering whether a trust can use the annualized income installment method (Schecule AI)... if the income is tilted towards the last quarter then that may help some.

 

[TeeRuh]

My HRBlock software flagged underpayment in both 2017 (significant) and 2018. It said I could pay it or let the IRS calculate it and bill me. HRB said there would be no interest if I paid it by the due date. I am still waiting for my 2017 bill. .

Any body have thoughts?
T.R.

 

[kaneohe]

Just wondering whether a trust can use the annualized income installment method (Schecule AI)... if the income is tilted towards the last quarter then that may help some.

The title on the form is:
Underpayment of Estimated Tax by
Individuals, Estates, and Trusts

so I would think so..............

 

[SecondCor521]

Just wondering whether a trust can use the annualized income installment method (Schecule AI)... if the income is tilted towards the last quarter then that may help some.

It could but for $15 I'd rather not fill it out, honestly. It looks horrific, and I'm already on moderately thin ice with the rest of the return.

 

[pb4uski]

In my experience it isn't as bad as it looks but I have my transactions in Quicken so it is easy to run reports for specified time periods.

 

[kaneohe]

It could but for $15 I'd rather not fill it out, honestly. It looks horrific, and I'm already on moderately thin ice with the rest of the return.

Good decision not filing SchAI if you value your time! On the other hand,if you want to remember not to underpay your taxes, doing SchAI will be an excellent reminder........it is an interesting experience tho.

My error on the $5 estimate. I'm used to the more conventional safe harbors.....100 (or 110)% of last yrs taxes or 90% of current yrs taxes.
In both those cases, the penalty is based on shortfall from the safe harbor,
not the total taxes due. I just got reminded about the total tax< 1K safe harbor and made the assumption that since your tax was 241 higher than that that your penalty could be based on that shortfall. I guess it doesn't work that way ..........appears that if your tax was 999, no penalty but if 1000 or more,
you have to calculate based on the other 2 safe harbors.......a mini-cliff.

Not sure about overpaying..........if you pay what you think is the correct amount, I doubt that IRS will come after you for $5, 10, or even $50.

 

[pb4uski]

Just curious... on the family trust that I prepare a 1041 for all trust net income is distributed to the beneficiary so the trust net income is zero and there is no trust income tax.... essentially all income gets passed through to the beneficiary and included on the beneficiary's personal tax return. IOW, line 18 is equal to line 17 so line 22 is zero.

 

[SecondCor521]

Just curious... on the family trust that I prepare a 1041 for all trust net income is distributed to the beneficiary so the trust net income is zero and there is no trust income tax.... essentially all income gets passed through to the beneficiary and included on the beneficiary's personal tax return. IOW, line 18 is equal to line 17 so line 22 is zero.

Yes, we could do it that way. The trust instrument basically states that it is at the discretion of the trustee (my Dad, who is also the beneficiary).

We could distribute some income now and reduce the taxes owed for 2018 low enough to avoid the underpayment penalty. But then I'd have to figure out how to do a K-1 and the allocations get all tricky. The trust has prior year state taxes, attorney fees, and tax preparer fees as deductions, and since the trust also receives tax-free income as well as state-tax-free income, the deductions need to be allocated between these things. Then if I need to further allocate between the beneficiary and the trust, that would get too complicated for me to handle. Plus I just finalized the trust and my Dad's tax returns without any K-1 and don't really want to redo all four of them.

In general we choose to distribute enough so that the total taxes are minimized between my Dad and the trust by distributing enough so that any income left in the trust is taxed at the same tax rate as my Dad's top marginal rate. If we were to distribute less, then that income would unnecessarily be taxed at a higher rate inside the trust. If we were to distribute all, then we would lose the (admittedly small) benefit of having some trust income taxed at lower rates than my Dad's top marginal rate.

Aside from minimizing taxes, my Dad's preference is to leave the money in the trust if he doesn't have any need for it. Currently he doesn't.