How to pay your taxes when you e-file

[Jerry1]

Thank you Cathy. I thought the form basically had a Jan 15th cut off. I'll go back and look at that but that makes sense.

 

[G-Man]

The underpayment penalty is calculated using the worksheet in the instructions for Form 2210.

If you go through Form 2210 and the worksheet what you end up doing is:
- calculate the minimum required quarterly payment for each quarter based on safe harbor rules or annualized income method
- figure out how many days after the due date you satisfied that minimum
- for each quarter, multiply each underpayment x (number of days late/days per year) x quarterly interest rate
- add all the individual penalties together

If you have not yet met the safe harbor, then the underpayment penalty for today is (amount you missed the safe harbor by) x .07/365, so ~19 cents per $1000 per day, or ~$5.75 per $1000 per month -- not exactly a fortune. As soon as you get your payments up to the safe harbor amount, (amount you missed the safe harbor by) = 0 for that day and all future days and the penalty stops accruing.


I agree that the IRS will often overlook the penalty. Some software, like TurboTax, will calculate it for you by default and include it on your return, but you can tell it not to and just wait for the IRS to send a letter.

For our Tax-Aide clients we don't calculate the penalty and we just tell them they might get a letter and if they do it's legit and they should pay it, and we try to convince them to fix their withholding. Usually they don't hear from the IRS unless they have an underpayment for 3 consecutive years, so some of them don't believe there is such a penalty and then they get mad at us when they finally do get a letter.

The CA FTB is much more rigorous and if you owe them more than $500 they'll be happy to send a penalty letter right away.

I noticed that TurboTax calculates the underpayment penalty for you. So, you are suggesting that TurboTax does not calculate the underpayment penalty correctly? Please advise.

 

[Jerry1]

I noticed that TurboTax calculates the underpayment penalty for you. So, you are suggesting that TurboTax does not calculate the underpayment penalty correctly? Please advise.

It calculates it correctly, but when I worked at the CPA firm, we figured that if Uncle Sam wanted to invoke a penalty, that was up to him to do it. We calculated the penalty so we could inform the client but allowed the IRS to calculate it and send a collection letter. Then we would try to get the penalty and interest dismissed when the letter came in. Basically say that it was an honest mistake and that steps are taken to ensure it will not happen again. Typically, we could get some consideration. I certainly wouldn't bother for a low amount of money, but at some point, it's worth the effort.

 

[cathy63]

I noticed that TurboTax calculates the underpayment penalty for you. So, you are suggesting that TurboTax does not calculate the underpayment penalty correctly? Please advise.

As far as I know TTax does the math correctly. I'm just saying the IRS often doesn't bother to collect the underpayment penalty, especially if it's small and you don't make a habit of underpaying every year, so you may be able to avoid it by telling TTax not to include it on your return.

I also learned last year, that TTax doesn't know when tax due dates are extended in certain areas because of Federal disaster declarations. Our taxes were due on June 17 last year due to a disaster declaration earlier in the year, and TTax was "helpfully" adding the Failure to Pay penalty to both our Fed and State returns. It know the IRS and FTB would have sent it back eventually, but we owed a lot because we had sold a rental property in 2023 and I didn't particularly want to send them a bunch more money we didn't owe.

 

[SecondCor521]

For our Tax-Aide clients we don't calculate the penalty and we just tell them they might get a letter and if they do it's legit and they should pay it, and we try to convince them to fix their withholding. Usually they don't hear from the IRS unless they have an underpayment for 3 consecutive years, so some of them don't believe there is such a penalty and then they get mad at us when they finally do get a letter.

I'm glad you wrote this and shared your experience; I've seen a lack of underpayment penalty assessment at my Tax Aide sites too.

I made a Roth conversion in December but probably didn't meet any safe harbors in 2024 so I made a 4Q ES payment in early January. I don't really want to complete 2210 AI but I don't want to pay an underpayment penalty. Bogleheads had asserted that the IRS imposes the penalty every time, so I was left with a dilemma.

 

[scrabbler1]

I write checks but I might try one of other methods this year. It amused me to see you can pay with cash. Payments | Internal Revenue Service

Certain I will owe but they said my 1099 isn't available yet so IDK how much.

I have been using the IRS's electronic payment system for several years. I file on paper, so when I mail out the return, I go to their website and pay the balance due. If a refund is due, I include the banking info on the return. I used to have an online account with the IRS, but when they changed their login procedure I lacked the technology to keep the account. So now I only use the above link. I also use it for estimated taxes.

With my state return, I have an account I use for estimated taxes. The state return allows me to include banking info for refunds or payments with the return.

 

[G-Man]

Thanks everyone for answering my question about interest accruing on the underpayment penalty. I love the knowledge and expertise that we have on this forum. I very much appreciate it. Thanks