My income changes a lot year to year since most of it comes from a bonus I get once a year.
I try to do my estimated taxes as best as I can, but I just got a letter from the IRS saying I owe a big penalty because I ended up owing more taxes than I paid throughout the year. I paid everything I owed by the deadline though.
Has anyone here dealt with the IRS to get a penalty reduced or waived? Any tips would help a lot!
Did you make most of your money late in the year? If that’s the case, you might want to use Schedule AI on Form 2210 to show the IRS when your income came in. Otherwise, they’ll assume you earned an even amount each quarter, which could be why the penalty seems high.
Can you share a bit more detail about when you got your income, how much you paid, and when? And maybe what your income was last year compared to this year?
Usually, you can’t get the penalty for underpayment waived if you paid everything by April 15. It’s basically interest on the taxes you owed earlier. The penalty isn’t usually that high—around 5% of your total taxes owed if you paid nothing during the year and only settled up in April.
To avoid it in the future, try to adjust your estimated payments as soon as you know your income for the year.
You can avoid penalties even with unpredictable income:
The IRS doesn’t automatically recalculate for you, so if most of your income came later in the year, you’ll need to use Schedule AI to correct their penalty calculation.
If this happens often, you might want to work with a tax professional.
@Tavi
I don’t think the first-time penalty waiver works for underpayment penalties.
Hayden said:
@Tavi
I don’t think the first-time penalty waiver works for underpayment penalties.
You’re right. The first-time waiver only applies to Failure to File, Failure to Pay, or Failure to Deposit penalties, not underpayment.
Hayden said:
@Tavi
I don’t think the first-time penalty waiver works for underpayment penalties.
Are you sure? I thought underpayment penalties might count as failure to pay. Has anyone here ever gotten one waived this way?
Here’s what the IRS says:
“We calculate the failure to pay penalty based on how long your overdue taxes remain unpaid. Unpaid tax is the total tax required to be shown on your return minus amounts paid through withholding, estimated tax payments, and allowed refundable credits.”
Source: IRS Penalty Relief.
Just to clarify, even if waived, you’d still owe interest on the underpaid amount.
@Tavi
Underpayment penalties aren’t part of the failure to pay category. Have you personally had one waived under the first-time rule?
Ray said:
@Tavi
Underpayment penalties aren’t part of the failure to pay category. Have you personally had one waived under the first-time rule?
No, I’ve always used the safe harbor rules to avoid penalties, but it’s good to know this for the future. Thanks!
@Tavi
Think of the underpayment penalty as interest for when taxes should’ve been paid, not a regular penalty. Just like interest from April 15 onward can’t be waived, neither can this penalty. Even though it’s called a penalty, it works more like interest.
What kind of penalty are you talking about? I don’t usually think of estimated tax penalties as “huge,” but everyone’s idea of huge is different.
For next time, use the worksheets in IRS Publication 505. They’ll help you figure out how much to pay each quarter to avoid penalties.
You can’t avoid the penalties. Just file a Form 2210 each year and make sure you pay 110% of last year’s taxes if your income is higher.
I’m in the same boat with unpredictable income. Check if your bonus is pushing you into a higher tax bracket. That’s what got me one year for not paying enough in my quarterlies.
Bennett said:
I’m in the same boat with unpredictable income. Check if your bonus is pushing you into a higher tax bracket. That’s what got me one year for not paying enough in my quarterlies.
Yeah, my bonus definitely moves me into a higher bracket.
Thanks, everyone, for the advice! Most of my bonus comes in August or September, and I think it was more than 110% of last year’s income, which is probably why I got the penalty.
I usually pay a small penalty every year, but this time it was a lot bigger. It sounds like this penalty is basically interest on what I owed earlier, and it can’t be waived.
I’ll just need to be more on top of estimating taxes late in the year and paying accordingly. Thanks again for all the help!
If I get a bonus in September that pushes my total income for the year to 125% of last year’s, how do they calculate the penalty?
Is it 5% from September to December on the bonus, or is it 5% from January to December? Basically, what’s the timeframe for the interest?
The Q4 estimated payment deadline is January 15 of the next year, so why couldn’t you figure out your taxable income by then?
Adley said:
The Q4 estimated payment deadline is January 15 of the next year, so why couldn’t you figure out your taxable income by then?
Paying by January 15 only covers Q4. It doesn’t erase penalties for underpayment in earlier quarters.
@Hayden
Right, but if you can show the income came in all at the end of the year, you might avoid penalties for earlier quarters by using Schedule AI.