Form 2210: Penalty for Underpaying Taxes
While everyone living in the United States is expected to pay income taxes to the IRS in some form, not everyone pays standard income taxes. Rather than getting federal income tax deducted from each paycheck and filing a return once per year, some people choose to pay estimated taxes four times per year. Estimated taxes can be advantageous for those with non-traditional sources of income, who don’t receive a regular paycheck that covers a given pay period. For instance, business owners, freelancers, and independent investors may choose to pay estimated taxes. However, if you pay your estimated taxes late, underpay your estimated taxes, or miss the filing deadline, there are consequences. When you aren’t diligent about paying your estimated taxes, you will likely be subject to monetary penalties that will increase the sum you owe the IRS. So how do you calculate penalties for estimated taxes? And, more importantly, how can you avoid paying these penalties? If you owe a penalty for estimated taxes, you may have to fill out IRS Form 2210. Keep reading to learn more about Form 2210, estimated taxes, and the different methods at your disposal to get out of paying estimated tax penalties. You can also skip to any section of this article by using the links below.
- What Is Estimated Tax?
- Who Pays Estimated Tax?
- What Is IRS Form 2210?
- When to File Form 2210?
- Form 2210 Requirements
- Abatement Services
What Is Estimated Tax?Paying taxes to the Internal Revenue Service (IRS) comes in all shapes and sizes. Most people pay taxes out of their paychecks every time their employer withholds income. But for some taxpayers, routine withholding does not make sense because they do not work in such a way that yields regular income. Rather than paying in small increments more frequently, individuals who do not receive their income in the form of a salary or wages may prefer to pay the IRS in lump sums four times a year.
Estimated Tax RequirementsEstimated taxes are the same as standard taxes in the sense that you must pay them. You do not get a free pass for choosing an alternative installment plan with the IRS. If you do not pay enough to the IRS in estimated taxes, you could potentially owe a penalty for underpayment of estimated tax.
Who Pays Estimated Tax?Those best suited to choose the quarterly federal tax payment known as estimated tax are business owners and individuals with significant income from investments or estates and trusts. In this alternative program of payment, taxpayers are expected to cover their dues four times in a given tax year. If you opt to pay estimated taxes, you can mark your calendar to make payments to the IRS on April 15, June 15, September 15, and January 15.
Farmers and FishermenIn most cases, farmers and fishermen are exempt from regular estimated tax requirements. This is, in part, because the incomes of farmers and fishermen are tied to unpredictable factors such as natural disasters and droughts. To qualify for an exemption to estimated tax payment rules, individuals must earn at least two-thirds of their income from farming or fishing. If you do qualify for the estimated tax exemption as a farmer or fisherman, you’ll only be required to make a single estimated tax payment, which is due by January 15. To dodge any potential IRS penalties, this tax payment must come out to two-thirds of the amount you owe in taxes for the year or 100% of the amount from the previous tax year. You should also be able to avoid paying an estimated tax entirely if you can file your tax return and pay your taxes in full by March 1.
What Is IRS Form 2210?Just like standard taxes, you can face a penalty if you pay your estimated taxes late, underpay them, or fail to pay them altogether. If, for whatever reason, you choose to pay estimated taxes and end up having to pay a penalty, IRS Form 2210 allows you to calculate that penalty and determine how much money you owe the IRS. To avoid a Form 2210 penalty in the first place, you must respect a number of requirements, which are outlined below.
Pay on TimeIRS Form 2210 determines the amount you owe in late penalties to the IRS for every payment due. Each installment is considered independently, meaning you could amass multiple penalties if you are not careful. You could even find yourself penalized for an installment you actually paid, if you did so at a later date than agreed upon. Estimated taxes are paid on a quarterly basis, meaning there are four deadlines you have to meet that are spread across the year. Generally, the four due dates for estimated taxes are:
- April 15
- June 15
- September 15
- January 15 (the following calendar year)
Pay in FullIn addition to paying your estimated taxes on time, it’s essential that you also pay the amount in full when it’s due. When you fail to pay the estimated taxes you owe in full, you will likely have to file Form 2210 to calculate a penalty, and this will only increase the amount of money you owe the IRS. Perhaps you’re worried about not being able to get your finances in order and make your estimated tax payments by the IRS’ deadlines. If, for some reason, you’re unable to come up with the money or other complications arise, you might consider filing Form 4868, which is an application to extend the deadline for your tax return. To avoid penalties by the IRS, you must file Form 4868 before the April 15 deadline and pay what you estimate to owe in taxes. If your application for an extension is approved, you will be given an additional six months to file your taxes if you’re in the United States, or an extra four months if you’re filing from a foreign country.
Taxpayers with Significant IncomeTaxpayers with a substantial income are subject to slightly different estimated tax rules than other individuals. If, during the tax year you’re filing for, you had an adjusted gross income (AGI) that exceeded $150,000, you must pay either 90% of the current year’s income tax liability or 110% of the previous year’s income tax liability to meet estimated tax requirements and stay in compliance with the IRS.
Publication 505The process of understanding and avoiding underpayment penalties for estimated taxes may seem daunting. However, the IRS has provided resources for taxpayers who wish to learn more about tax withholding and estimated tax. Publication 505: Tax Withholding and Estimated Tax is a good resource that attempts to explain pay-as-you-go federal income tax, withholding, and estimated tax. Refer to this resource for an in-depth look at how to stay in compliance when paying estimated taxes.
When to File Form 2210?The IRS will often calculate tax penalties on your behalf rather than having you fill out Form 2210. However, in some instances, they may require you to fill out the form for one reason or another. If the IRS reaches out to you and asks you to fill out Form 2210, it’s best to follow their instructions as closely as possible and submit the form in a timely manner. To make things easier, IRS Form 2210 actually provides a useful flowchart that can help you determine whether or not you need to file it. The IRS states that you do not need to file Form 2210 if:
- You owe a sum of less than $1,000 after deducting your withholding and any refundable tax credits.
- Your withholding and refundable tax credits exceed 100% of the amount due on last year’s return or 90% of the amount due on this year’s return. Whichever figure is smaller is the one that applies in this case.
- None of the boxes in Part II of Form 2210 apply to your situation. In this case, you may still owe a tax penalty, but you won’t be required to submit Form 2210.
Form 2210 RequirementsThe IRS uses Form 2210 for underpayment of estimated tax (Form 2210-F for farmers and fishermen) to track whether estimated taxes have been paid in full and on-time. If a taxpayer does not honor an IRS installment agreement, the IRS measures the tax deficiency by comparing each quarterly payment as it appears in Form 2210 and Form 2210-F. From this vantage point, the IRS can establish the appropriate penalty with confidence. There are two primary methods available when it comes to filling out Form 2210. Depending on the circumstances, you may be able to use either the short method or the regular method. You can use the short method if you didn’t make any estimated tax payments over the course of the year, if your only payments were withheld from federal income tax, or if you paid an equal amount of estimated tax on each of the four payment deadlines. So when do you have to use the regular method? You’ll be required to use the regular method if any of your estimated tax payments were late, you checked boxes C or D in Part II of Form 2210, or you’re filing Form 1040-NR, and you weren’t provided wages as an employee subject to federal income tax withholding.
Abatement ServicesYou can resort to abatement services if you seek to dispute a penalty. Generally speaking, you must convince the IRS that you had a good reason for not paying what was due. Taxpayers submit IRS Form 843 to claim an abatement. The Internal Revenue Manual (IRM) Section 184.108.40.206.2 is helpful in preparing a request for a refund from the IRS. The IRM catalogs several successful defenses against penalties.
First-Time Penalty AbatementOne of the more common success stories in appealing a penalty is playing the first-time penalty abatement card. The IRS is known to forgive taxpayers requesting a waiver for the first time who have a history of compliance.
Reasonable-Cause ArgumentIn addition to the first-time penalty abatement, another option is what is known as reasonable-cause. The aforementioned IRM exposes instances of reasonable-cause that granted favorable results to the penalized. These include but are not limited to:
- Serious illness
- Bad advice
Underpayment Penalty AbatementIt can be challenging to argue reasonable-cause in the case of estimated tax underpayment penalties. Unless a taxpayer retired or became disabled over the course of the tax year, the best way to get out of paying estimated tax penalties is likely going to be:
- Prove that the IRS made an error in charging you with the penalty.
- Prove that the penalty could be lessened or lifted if it were measured by another means.
ConclusionPrevention is better than the cure, as the saying goes. This rings true both in medicine and when it comes to your taxes. Paying your estimated taxes in full and on-time is preferable to spending time and money trying to determine the amount you owe the IRS in penalties and interest. Hopefully, this article cleared up the purpose of IRS Form 2210 and how you can avoid estimated penalties. Still, we understand if you’re having a difficult time wrapping your head around it all. If you want help staying in compliance with the IRS and avoiding tax penalties, contact Community Tax. Our tax experts will help you keep your taxes in order and resolve any tax problems you may be experiencing. If you need to file Form 2210, we’ll work with you to make sure it’s done correctly. Call us today at (844) 328-5857 for a free tax consultation!