My client gave me a letter from the IRS and got a refund from line 77 on their 1040 of $389. I have never heard of a refund from estimated tax penalty before. Is this common????
-
SueBaby -
It Can Happen
Yes, it is more common than you might think.
The IRS applies its estimated tax penalty not just annually, but for each of the 4 estimated periods that require an estimated tax payment.
What has probably happened: your client has a refund, but most of his estimated payments were on the Jan 15 or Sep 15 installment, leaving him underpaid for the Apr 15 and Jun 15 installment.
Your software probably has a subroutine which calculates the penalty on Form 2210 if you insert the actual dates that your client made the payments. You will probably discover he has rear-ended his payments instead of making them equally during year.
If you feel your client actually made most of his money late in the year, he may qualify to have the penalty removed using the "annualized" method prescribed for Form 2210. This will be tedious, and time-consuming work, so make sure there is enough recovery of the penalty before going down that road. -
Est tax payments
The IRS tracks not only the amounts paid for estimated taxes but also the dates of payment. "Settling up" just prior to Jan 15th will not cut it, if payments were also due in April, June, and September.
If the facts support it (such as a big stock sale for a gain in November) the annualized method can lower the Form 2210 penalties significantly. As Nashville mentioned, be ready for some serious number-crunching even with good tax software.
Also, be sure you did show/use the prior year income tax liability in the calculations, especially if this was a new client.
One other little trick: If this person is an employee, and realizes late in the year that there is going to be an underpayment problem, he can then tell his employer to take out a truck-load of withholding taxes. They are considered to have been paid "evenly" throughout the year.
FEComment
-
Refund??
It is more likely that IRS will send a bill for the ES under payment penalty than to refund it.
I have clients receive letters, where I have reported the 2210 penalty and then the IRS sends a letter showing that they are overpaid and then the IRS shows the underpayment penalty and then the account will show zero balance due. This letter is very confusing for the taxpayer as they think they are either due a refund or owe money.
Is that what your client received?
Example of one we just received. On the tax return - line 73 shows overpayment of $126, however line 77 also shows the underpayment penalty of $126. Tax due -0-
The letter from IRS shows Overpayment of Taxes of $126 and a line that says "Less" - Penalty of $126, Amount you Overpaid is $ -0-.
SandyComment
Comment