Tax Penalty

[EA Carol]

My client is being charged a penalty for not paying 100% of last years tax liability. The IRS is baseing the penalty on the original filing of the 2005 tax return, however I amended the tax return before the end of 2006 and before the filing of the 2006 tax return. The client would not be subject to a penalty if it was based on the amended return. Also on the amended return I asked the IRS to keep the refund as an estimate. They returned the money to the client.

My question is, must the penalty be based on the original return or can the amended return be used?

Thanks
Carol EA

[BOB W]

It ..........

.... should be based on the final liability for the year, amended in this case. A simple followup letter should solve the problem.

I instruct my clients to never cash a refund check if it was designed to be applied to the following year.

[George Boutwell]

Which Penalty?

If it's estimated-tax penalty, it's based on the tax shown on the original return (whether that figure later goes up or goes down).

[Corduroy Frog]

Original Return

Carol, the original return determines the 100% test from the previous year.

I made this mistake back in the '80s, and the way IRS explained it me, is that it was based on a Revenue Ruling.

Apparently, taxpayers who didn't want to pay estimated taxes were amending their prior year returns to lower the amount of estimated taxes they were having to pay. At least, that's what I was told by the IRS.

I do believe, however, you may be entitled to some recourse if you can show you requested a refund to be applied to the shorted estimated tax. However, the doctrine of Bob W has been driven home several times when a customer cashes a check before asking me. I tell my clientele to NEVER cash an unexpected check, but some of them can't resist and leave the money alone. It's like..."Oh boy -- Free Money!!"

[bertrans]

penalty

By amending the 2005 return before its due date, you created a socalled superseding return, which became the original return; the 'amended' tax would then have become the original tax. The IRS position is in error.

[Jiggers]

2210 Penalty & 1040X

I tried several times many years ago to get the 2210 penalty reduced or abated on an amended return.

Never happened.

In each case there was a 2210 showing a penalty on the original 1040.

By amending the return for whatever reason, the 2210 penalty was either reduced or removed completely. I attached a corrected 2210 and the IRS refused to allow it.

[George Boutwell]

You're Right

I tried several times many years ago to get the 2210 penalty reduced or abated on an amended return. Never happened. In each case there was a 2210 showing a penalty on the original 1040. By amending the return for whatever reason, the 2210 penalty was either reduced or removed completely. I attached a corrected 2210 and the IRS refused to allow it.

When all else fails, we can always try to follow the Manual.

20.1.3.2.7 (09-12-2006)
Determining the Penalty Amount

. . . Estimated tax penalties are computed on the amount of tax reported on the original return. A second return filed on or before the due date of the return is considered an original return.

If an adjustment is made to the tax of an original return, including extensions, as a result of either an audit or the taxpayer filing an amended return (Form 1040X) before the due date the penalty amount may be adjusted, based on the new tax amount.

If an adjustment is made to the tax of an original return, after the return due date, including extensions, as a result of either an audit or the taxpayer filing an amended return (Form 1040X), the penalty amount will generally (see the following exceptions) not be adjusted.

If an amended joint return is filed after separate returns (i.e. an individual files joint return after filing a separate return for a taxable year in which they could have filed a joint return), the estimated tax penalty is based on the joint return. This is the case, even if it is filed after the time for filing the return (including extensions), as long as a joint return is filed before the expiration of the statute of limitations. For additional information refer to IRM 21.6.7.4.6, "Interest and Penalty Considerations."

If there is a math error on the return, the computer is programmed to compute the penalty on the lesser amount of tax as computed by the taxpayer or corrected by IRS. Example: The original return shows the taxpayer computed the tax to be $1,300. Due to a math error, the tax was corrected to $1,800. The estimated tax penalty would be computed on the lesser amount of tax, $1,300.

[Jiggers]

Thanks, George

You posted what I was looking for!

[bertrans]

penalty

I want to thank you, too, George. Your explanation was clear, concise and correct.

[bertrans]

penalty II

One more pesky exception: the Service, in an audit, can argue that the intent of the TP in filing the original return was (a)not credible or (b)fraudulent - and therefore increase the estimated task penalty.

[Kram BergGold]

George and Courderoy

I think what you were thinking about when you answered is if you file a return and compute a 2210 penalty and later amend that return for a refund the 2210 penalty does not change.

[bertrans]

penalty

Bear in mind, you can always file a 2210, after the original return filing, using the annualisation method, if you meet the applicable criteria. The IRS will accept such a recomputation.