Don’t Panic: How to Deal with the Estimated Tax Penalty in 2023

Man Counting Money for Estimated Tax Payment
Photo Courtesy of Pexels – Kuncheek

The IRS just announced the start of the 2023 filing season as January 29. Sometimes some software companies allow you to file sooner than that but in the end the IRS isn’t counting the processing time sooner than January 29 even if you “filed” sooner. The returns in those cases are just in a holding pattern to test the system. What your tax software may try to do is assess an estimated tax penalty, but you don’t have to let it do that.

What may happen this year once you submit is that you may see your program wanting to “assess” a penalty on line 38 of the 1040. Even if you use a preparer to do your taxes these estimated tax penalties may automatically go on the return. And once it’s assessed there at the IRS during filing the penalty can be really hard to remove.

Form 1040 Line 38
Photo Courtesy of the IRS

Other penalties like “failure to file” and “failure to pay” are much easier to remove if you have a good record of compliance. For example, you file on time and pay the tax by the due date. So if you have a year where that doesn’t happen and you miss filing on time or you don’t have the tax paid by the due date and you get a letter saying you owe more money from either of those penalties, then call the IRS and ask for them to abate them.

The IRS won’t do it automatically unless you actually ask them to abate the penalty and you actually qualify. There is a first time abatement the IRS can do, if you meet the qualifications. Sometimes it gets more complicated and you may have to send stuff in. But these two penalties are much easier to get rid. The IRS won’t do that every year under that “first time abatement” policy since it’s based on the prior three years in most cases.

An estimated tax penalty could cause you to panic if you’re filing taxes on your own. It could be a smaller penalty but who wants to pay more?

The IRS will tell you we have a pay as you go system for taxes. In most cases, you are a W-2 employee and as long as the W-4 you gave the employer is correct you should have enough paid in. Ideally what happens is that you file your return and you neither get a refund nor do you incur a balance and you break even. Face it, but that rarely happens.

But what if you have some odd income? I am not talking about the “job” that gave you a 1099 making you an independent contractor. If an employer tells you that you are an independent contractor, realize you may need to make payments to the IRS as you earn money most of the time.

Sometimes you may have other income like some investment paid off late in the year. Or you got some special bonus and they didn’t withhold anything. Or maybe you cash in some US Savings EE bonds and you didn’t think to tell the place like a bank you cashed them at to withhold taxes. Yes, you can do that with a savings bond and they will send you a 1099-INT with the withholding you requested.

For instance, lets say you didn’t do that with withholding and the tax program says you owe a penalty. If you had uneven income during the year and you had a lot of earnings in the last quarter that matters. You may need to submit a form 2210. And sometimes you may not need to do that. The Form 2210 has a section at the top where it tells you whether you need to file it or not.

Form 2210
Photo Courtesy of the IRS

Just don’t panic if you get hit with this penalty. Just don’t self-assess the estimated tax penalty since that’s like setting it in cement. And if you are confused by the Form 2210, look at the instructions again and if you still need help call the IRS. They have people who will talk you through the form. They won’t do it for you, but can help you understand the parts that are confusing.

Tax time is trying and the IRS can be scary. However, the IRS workers are taxpayers too and they can be very helpful. This particular form, the 2210, is handled by an area formerly called the Schedule D area, now called the Miscellaneous area. They just changed the name since they do more related matters in that area. But they can help you. Also, Publication 505 and the Form 2210 Instructions are great references too.

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