Discussion:CP14
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| 17 November 2007 | |
| Client with a letter from IRS....penalty and interest on return for 2006 for non payment of estimated taxes...
I will call on Monday the Practitioners Hotline....what is a reasonable cause for abatement of penalties and some interest? In 2005, client got a refund on overpayment of taxes; in 2006 we extended the return until we could assess some issues with his S corp. Return was filed timely with extensions and now he owes almost 300.00 for penalties and interest on estimated tax payments. I was under the impression that if you paid your 2005 liability in full you would not be subject to the penalty for underpayment of estimated payments. Since he had a refund of taxes withheld, then he paid OVER his liability. Any response as to how I can request IRS abate the penalties assessed? He paid in full with his tax return....aarrgghh.... | |
Bottom Line (talk|edits) said: | 17 November 2007 |
| I'm a little confused. Was the penalty for 2005 or 2006? Did he get a refund for the year that the penalty is? | |
| 17 November 2007 | |
| The penalty was for 2006. He got a refund in 2005.
Can we not abate the penalty in 2006 since he paid in 2006 at least 100% of his tax liability in 2005? He should not have been responsible for estimated payments in 2006....thanks BL!! | |
Bottom Line (talk|edits) said: | 17 November 2007 |
| Depends upon if he paid it in regular intervals or if he waited until the end and wrote a big check. Did he owe any extra money for 2006 and pay it after 4/15? (This is why I hate estimated payments; don't have this problem if it's wages, even if only one big paycheck on 12/31.) | |
| 17 November 2007 | |
| "Can we not abate the penalty in 2006 since he paid in 2006 at least 100% of his tax liability in 2005?"
There are a number of "it depends". For example, if AGI exceeds 150K then the percentage is 110%. Another example, depends how the tax payments were made (i.e. withhholding v. quarterly estimated v. large payments on extension). Only withholding tax is considered as paid over the year. The customary use of reasonable cause to abate penalties is NOT applicable to estimated taxes. The exceptions are statutory - take a look at §6654(e). The only place reasonable cause can be used is in the limited application in §6654(e)(3)(B). | |
Death&Taxes (talk|edits) said: | 18 November 2007 |
Sec. 6654(e)(3)(A) concludes with "or other unusual circumstances the imposition of such addition to tax
would be against equity and good conscience." Assuming his payments were not made through withholding, or in four equal installments equal to 100% (110%) of his 2005 tax, you would have to rely on the above phrase. From your description I don't think what happened meets these words. Your only other course would be annualization, but S Corp earnings are done on a quarterly basis so that you cannot lump them into the fourth quarter unless the results show this. Also note my phrase '4 equal installments' is not quite correct....he could make them in three, two or one as long as the first is made in April and the others follow consecutively. | |
| 18 November 2007 | |
| Thanks guys...his actual tax payments were made in the form of withholding taxes on his payroll checks. In 2005, he overpaid and got a 400.00 refund. In 2006 due to cash flow and waiting for "check is in the mail" routine, he only had about 29% of the total tax liability in the form of withholding taxes on his salary throughout the year. He ended up borrowing from a credit card to pay the tax due with the return as he is still seeking 20K of payments owed to him from a contract.
Since he overpaid by 400.00 through w/h in 2005 and owed taxes to the tune of 2500.00 in 2006, it appeared to me as he was not going to be subject to this penalty. God how I hate the ES payments as well BL!! His AGI is WAY below the AMT threshold.... | |
Death&Taxes (talk|edits) said: | 18 November 2007 |
| Forget the refund, Sandy, what was his total tax liability for 2005 and how much was withheld via wages for 2006. From the amount owed, it does not appear that his AGI was above 150,000 so if the withholding equaled or exceeded Line 63, Form 1040 2005, there should be no penalty. It's that simple! | |
| 18 November 2007 | |
| That is what I thought D&T; why they assessed a penalty I DO NOT KNOW. His liability was completed paid in 2005 and as well his 2005 liability was completely paid via withholding in 2006. | |
Bottom Line (talk|edits) said: | 18 November 2007 |
| If his 2006 AGI was less than $150,000 and his 2005 liability amount was completely paid via 2006 withholding, he should not get a penalty. | |
Death&Taxes (talk|edits) said: | 18 November 2007 |
| Next step, review the penalty notice carefully....if he owed $2,500.00, are you sure this is not a late payment penalty.....1/2 percent a month....though the most this could be would be $175, assuming payment was received by IRS after October 15th....that plus interest could equal $300.
If this guess is not correct, I would simply send them a 2210.....in fact, did he get a 2210 with the notice for usually if the penalty is for lack of estimated tax, they automatically include the form. | |
| 18 November 2007 | |
| Yes, they included a 2210. The penalty is imposed for estimated taxes. Late payment penalty also applies but the main source is the underpayment of es payments....ProSeries did NOT calculate an underpayment penalty and now the notice....I am going to call them tomorrow and see what is up with all this!!
If indeed they don't abate the penalty (I did not do the prior year return or any previous years) so there may be something amiss, then can he make a payment with is 941 to catch up? He will be due an EIC this year because of his business loss and very little in the way of taxable income....if he could get advanced EIC then he actually has paid in MORE than what his liability will be for 2007. I would like to abate the penalty due to his business going almost "under" in 2007 but don't know how to reconcile this with IRS....Thanks guys! | |
