Can Following Safe Harbor Estimated Tax Payments Still Result in an Underpayment Penalty?

[audreyh1]

This the way I understand it also; in fact ANY income received in 2025 should have no impact on safe harbor based on 2024 tax liability.

That is correct. That is why it’s a safe harbor. It doesn’t require you to know your 2025 income in advance.

 

[SevenUp]

I wonder if tax withholding that was done in Sep constitutes to being untimely.

Nope. Default is to assume all withholding occurred equally throughout each "quarter". One may use actual withholding timing if that works better than the default.

 

[cathy63]

Am I confused about withholding (even if done in a lump, like with an IRA withdrawal) being done late in the year?

I was under the impression that you were covered, if your withholding exceeds your tax due. But is that not the case, if say, a large chunk of my taxable income was from a stock sale in Q1, and the w/h was in Q4?

By default, the IRS will treat the withholding as if it was paid equally through the year. Also, they will default to treating your income as if it was received equally through the year. They don't actually know when withholding or income events happened.

The reason I said that if OP does owe a penalty, Schedule AI might not help if income is front loaded is because when you file that form you're telling the IRS you do want them to pay attention to the dates when everything happened. He elaborated and explained that he did make 4 equal payments, so I think this is likely an error on the IRS' part (or possibly an error on the 1040-X or corrected 1040). Either way, they should fix it once a real person looks at the calc on Form 2210 and sees that no penalty is owed.

 

[Dalton]

Food for thought: When I calculate safe harbor, how much I need to withhold, RMD, etc., for the IRS, I always make sure I withhold a little extra (or withdraw extra for RMDs), to assure there is no discrepancy with rounding or something silly that could result in me playing mail tag with the IRS for months on end (i.e., I don't try to withhold an amount that is to the penny of what I calculated).

 

[cathy63]

Food for thought: When I calculate safe harbor, how much I need to withhold, RMD, etc., for the IRS, I always make sure I withhold a little extra (or withdraw extra for RMDs), to assure there is no discrepancy with rounding or something silly that could result in me playing mail tag with the IRS for months on end (i.e., I don't try to withhold an amount that is to the penny of what I calculated).

It actually doesn't matter that much. The penalty for underpayment of estimates is just the interest on the difference between what you paid and what you should have paid. The IRS won't go after you if you underpay by a little bit. If you are under by $100 at 7% interest the most you could owe would be $7, and it's really more like $3 if the underpayment is spread over all four quarters.

 

[RetiredHappy]

We use the owe less than $1000 safe harbor when we withhold our taxes and avoid quarterlies.

 

[Dalton]

It actually doesn't matter that much. The penalty for underpayment of estimates is just the interest on the difference between what you paid and what you should have paid. The IRS won't go after you if you underpay by a little bit. If you are under by $100 at 7% interest the most you could owe would be $7, and it's really more like $3 if the underpayment is spread over all four quarters.

Thanks. I'm aware... that seems like about what I paid for interest and penalties owed on the approx $50 I underpaid back in 1994, in college, when I got hurt and couldn't work, plus the $100 I DID send with my return didn't have my SS# on it, so didn't get applied to my tax debt. Trust me, it wasn't worth the hassle then (I should have sold plasma blood or something), and it would be even less worth it now since I have the money .

 

[Texas Proud]

It might be just me (and you might not have done this) but I would not have relied on the withholding to meet the threshold...

I also would not have paid to the exact dollar.. give it a little room..

 

[plsprius]

Once this is resolved, I hope the OP will give us a recap.

I'm curious to learn more about what can go wrong (e.g., IRS mistakes) when relying on the Safe Harbor, and what steps it took to fix it.

 

[Trooper]

It might be just me (and you might not have done this) but I would not have relied on the withholding to meet the threshold...

I also would not have paid to the exact dollar.. give it a little room..

I did rely on the withholding to meet the threshold, although the amount was small. In the future I may not rely on it, and instead just use 100% or 110% of my PY liability. That will keep things cleaner and provide a little buffer.

Once this is resolved, I hope the OP will give us a recap.

I'm curious to learn more about what can go wrong (e.g., IRS mistakes) when relying on the Safe Harbor, and what steps it took to fix it.

I will definitely do that once resolved. Currently I'm struggling with Form 2210 and a bad cold. The Form isn't laid out very well for taxpayers with situations like mine. Luckily I used H&R Block software to file both the original and the amended return, so that's helping me unravel the IRS' logic.

 

[Texas Proud]

Hmmm, can you get H&R block to give you some human help?

 

[Trooper]

Hmmm, can you get H&R block to give you some human help?

That's an idea, but I am leaning toward calling the IRS at the number listed on the form. I'm hoping that the agent, once he/she looks at my 2024 and 2025 transcripts (which I will also have in front of me during the call), will realize that the IRS is in error. If that's the case I'm not sure what Block can do.

 

[Trooper]

Quick update. After three days (off and on) of being on hold with the IRS, I decided to call and schedule an appointment to resolve this. The agent who scheduled the appointment was actually pretty helpful in trying to solve my issue, but couldn't. So I have an hour drive to the nearest Taxpayer Assistance Center on Monday morning. It still beats the mind-numbing telephone hold process - I wouldn't wish that on my worst enemy.

 

[Trooper]

I went to the nearest Taxpayer Assistance Center (TAC) this morning and after about ninety minutes there, the agent couldn't resolve my issue. The agent knew I shouldn't have to pay the underpayment penalty, but his system wouldn't let him waive or abate the penalty. He was also on the phone with other (maybe 2nd-level?) agents for assistance, but to no avail. I even asked if I could speak to one, but was told I could not. The agent asked me why I didn't file Form 2210 with my return, and I told him I didn't have to because I owed no penalty, per my tax software and Form 2210 itself. I believe HRB would electronically file the form if it was needed, but never had the situation to know for sure.

I left the TAC with the recommendation to snail mail Form 2210, along with the original IRS Notice CP22A. As @cathy63 advised in post #15, I will also include a short cover letter and a screenshot of my payment record on irs.gov. @cathy63 was correct all along; an agent on the phone (or even in person) cannot resolve these types of issues.

I am still not sure why I got the notice and the penalty. Part of me thinks that it is because I filed an "amended" return before April 15. I put amended in quotes because I have learned that a corrected return filed prior to April 15 is actually a "superseded" return, while a corrected return filed after 4/15 is an amended one. There are some subtle differences between the two, but right now i am just hoping my penalty gets waived, and that I get a timely notification of the waiver.

 

[Jerry1]

Unbelievable. They want you to file a form that in essence isn't required and an actual person (agent) agreeing with you could not correct the error. What confidence is there that the person reviewing your 2210 will have any further ability to get this right. Ugh. Of course, you have to try and I'm not surprised that Cathy's advice was sound but I can't understand why someone couldn't get this corrected while you sat down with them. Frustrating to see and I'm sure many times more frustrating to experience.

 

[plsprius]

I wonder if the source of this IRS problem might be a rounding "error" within the IRS systems. Since the OP paid the 110% safe harbor amount exactly to the dollar, perhaps some item on the tax return rounded up or down caused the issue by falling short of 110% by a tiny amount. I have used the safe harbor rules before, so I'm hoping that filing form 2210 with an explanation might be enough to resolve the issue, especially if I find myself in this situation someday.

 

[cathy63]

The agent asked me why I didn't file Form 2210 with my return, and I told him I didn't have to because I owed no penalty, per my tax software and Form 2210 itself. I believe HRB would electronically file the form if it was needed, but never had the situation to know for sure.

I am sorry to have been correct about the agents' inability to help you. I know it's usually a waste of time to do things in person with the IRS, but still always hope to be wrong about that.

When you filled out Form 2210 using the flowchart at the top of the page, did you get to one of the boxes that says "Don't file form 2210"? If you did, then they really screwed up and I think sending in the form and cover letter would help, though it may take a few months. If you got to another box, then they actually do need the form to calculate the penalty is $0.

I also agree that it's due to filing the second return before the due date. [It's interesting that they treated it as a superseded return. I've heard that consumer software such as HRB can't file a superseded return (and yes, it drives me crazy that they don't call it a superseding return) because they will always include a 1040-X, which is what makes it an amended return.] Sadly, once you got to the point where you needed to file a second return, there was probably no way to avoid this situation.

 

[cathy63]

I wonder if the source of this IRS problem might be a rounding "error" within the IRS systems. Since the OP paid the 110% safe harbor amount exactly to the dollar, perhaps some item on the tax return rounded up or down caused the issue by falling short of 110% by a tiny amount. I have used the safe harbor rules before, so I'm hoping that filing form 2210 with an explanation might be enough to resolve the issue, especially if I find myself in this situation someday.

If you fall short of your "required annual payment" as calculated on Form 2210, then the penalty is the interest on the difference between that amount and your actual payment. So if you miss by a tiny amount, the interest would also be very tiny.