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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 3. Estimated Tax Penalties

20.1.3  Estimated Tax Penalties

20.1.3.1  (06-23-2009)
Overview

  1. This Section of the Penalty IRM 20.1 discusses the estimated tax penalties for both individual (Internal Revenue Code (IRC) section 6654) and corporate (IRC section 6655) taxpayers.

  2. Taxpayers are generally required to pay income tax as income is earned. This is accomplished via withholding from income, or via estimated tax payments. Taxpayers who do not have sufficient amounts withheld, and who fail to make estimated tax payments as required by law, generally are assessed a penalty for underpayment of estimated tax.

20.1.3.1.1  (06-23-2009)
Penalty Transaction Codes

  1. ES Penalty Transaction Codes are:

    • TC 176 — Computer generated assessment of an ES penalty,

    • TC 177 — Computer generated abatement of an ES penalty,

    • TC 170 — Manual assessment of an ES penalty by IRS, or self-assessment via Form 2210, Form 2210-F, or Form 2220, as applicable. Self-assessed ES penalty will have the same DLN as the TC 150 return.

    • TC 171 — Manual abatement of an ES penalty by IRS.

  2. Manual assessments are determined by Area or Campus employees and are input through IDRS or pipeline processing. Employees who cannot directly input the penalty assessment to IDRS need to follow functional guidelines to request the input of an assessment.

  3. Manual assessments can be posted alone or along with tax adjustments, credit transfers (doc code 24), or alongside payments (doc code 17 and 18).

  4. Manual abatements can also be posted alone or along with tax adjustments or credit transfers (doc code 24 and 48).

  5. Computer generated assessments and abatements happen when an original return posts, or when timely estimated tax credits (including withholding) are adjusted.

  6. A module is restricted from generating ES penalty adjustments if a previous manual IRS adjustment is posted in the module (does not include self-assessment TC 170), or if the return in the module contained condition code "P" (IMF), or either "A" or "8" (BMF).

  7. ES penalty must be manually addressed when —

    • Adjusting timely estimated tax credits or withholding, and the module is restricted from generating ES penalty adjustments; or when

    • TC 150 posted in the module is not the taxpayer’s original return (i.e. SFR or 6020(b) return; mixed entity or mixed period with wrong return posted first; adjustment is due to superseding return filed prior to return due date, including extensions); or when

    • TC 150 posted in the previous tax year’s module is not the taxpayer’s original return, and the required annual payment was based on prior year’s tax.

  8. Manual penalty abatements (TC 171) require a penalty reason code (PRC) to be present in the fourth reason code position of the ADJ54 adjustment input screen.

    • Use PRC 045 if the original penalty was IRS assessed (TC 176), and the penalty is being adjusted because of either a superseding return or because the taxpayer provided a Form 2210 or Form 2220 that shows a lower penalty (or no penalty) because the taxpayer used a different method for computing the penalty (i.e. annualized income installment, adjusted seasonal, withholding reported when actually withheld).

    • Use PRC 044 if all or part of the penalty is abated because the taxpayer qualifies for a specific waiver listed in the Form 2210 or Form 2220 instructions, or if all or part of the penalty is abated because the penalty resulted from the taxpayer's reliance on erroneous written IRS advice.

    • Use PRC 016 if the original penalty was self-assessed (TC 170), and the penalty is being adjusted because the taxpayer or IRS is providing a corrected computation, or because the taxpayer filed a superseding return.

20.1.3.1.1.1  (06-23-2009)
Computing the Penalty Using IDRS Command Code COMPA

  1. IDRS command code COMPA with definer "S" (COMPAS) is available for computing the estimated tax penalty under both IRC sections 6654 and 6655. The basic command code syntax information can be found in IRM 2.3.29, and in the Job Aid Book on SERP under the IRM Supplements Tab.

  2. There are two methods for computing the estimated tax penalty using command code COMPAS. Both methods should arrive at the same penalty if the data is entered correctly.

    • Cumulative Liability or Running Balance Method

    • Separate Liability Method

  3. Payments and credits are applied under either method first to the earliest unpaid liability.

  4. Under the Cumulative Liability or Running Balance Method a running balance is computed beginning with the earliest payment or liability date, and ending with the return due date. COMPAS is used to compute a penalty for each period during the running balance where the balance is debit.

  5. Under the Separate Liability Method a separate running balance is computed for each liability beginning with the liability with the earliest due date. The running balances are computed to the earlier of the return due date or the date the particular liability is paid in full.

  6. For an example using both of the above referenced methods, See Exhibit 20.1.3-5.

20.1.3.1.1.2  (06-23-2009)
Return Posted to Wrong TIN or Period

  1. At times a tax return posts with transaction code 150 to the wrong TIN or tax period. This may happen as a result of taxpayer error, service error, or (increasingly so) as a result of identity theft.

  2. Because the computer bases the estimated tax penalty on the tax shown on the return that posts with transaction code 150, it is nearly always necessary to manually compute and adjust the estimated tax penalty when correcting an account where the wrong return posted with TC 150. The only exception is the instance where the TC 150 reflects zero tax.

  3. If the correct return has been received, or has posted in the module with transaction code 976 or 977, follow mixed period or mixed entity procedures as outlined in IRM 21. Manually compute and adjust the ES penalty based on the lesser of

    1. tax shown on the correct return, or

    2. tax as corrected on the correct return.

  4. If the correct return has not yet been filed, or if a return is not required, manually abate any existing ES penalty. Input TC 170 for zero amount if there is no existing ES penalty. This will prevent the computer from assessing an ES penalty when erroneously reported withholding and/or other credit amounts are removed from the module.

20.1.3.1.2  (06-23-2009)
Superseding Returns

  1. In most cases the estimated tax penalty is computed based on the tax shown on the taxpayer's original return. However, if the taxpayer files a superseding return, the penalty is computed on the tax shown on that superseding return.

  2. A superseding return is defined as a return (including an amended return) that is filed after the original return, but on or before the due date for filing, including extensions. Please note that the terms original and superseding apply to the order in which the returns were filed, and not to the order in which they were processed.

  3. The estimated tax penalty MUST be manually computed and adjusted unless—

    • the tax on the original and the superseding return is the same; or

    • the superseding return posted as TC 150 in the module.

    The manual adjustment requirement applies even if there is no penalty due, or if the penalty does not change. The manual adjustment will prevent an incorrect computer generated adjustment if withholding or ES payments are changed.

20.1.3.1.3  (06-23-2009)
Requests for Waivers and Abatements — In General

  1. Waivers are sometimes granted by legislation, regulation, or administrative pronouncements to provide relief from estimated tax penalties created by the retroactive application of a change in statute or Service position.

  2. If the taxpayer establishes that the waiver criteria are met, take the necessary action to suppress or adjust the penalty as appropriate.

  3. When a determination is made to cancel an estimated tax penalty because the individual is entitled to a waiver, the appropriate Penalty Reason Code must be entered either on the case file or the input document for entry to the Master File via the appropriate data entry method.

20.1.3.1.3.1  (06-23-2009)
Estimated Tax Penalty and Reasonable Cause

  1. The penalty for underpayment of estimated tax cannot be removed or waived for reasonable cause alone.

  2. The penalty for underpayment of estimated tax generally is not waived as a result of disaster. However, in the case of a Federally declared disaster area, "the Secretary may specify a period of up to 1 year that may be disregarded" in determining whether or not estimated tax payments were paid on time. In these cases the IRS will issue a memo with specific instructions regarding the payment of estimated tax in the affected area.

  3. Masterfile programming generally takes all special disaster area rules into consideration when computing the penalty for underpayment of estimated tax. Even when the taxpayer’s books and records are kept within the disaster area, while the taxpayer’s official address of record is not, manual adjustment of the penalty should not be required for taxpayers affected by a widespread disaster. See IRM 20.1.3.1.3.2.1.

20.1.3.1.3.2  (06-23-2009)
Waivers

  1. The criteria for available waivers (if any), as well as instructions for requesting a waiver, are contained in the instructions for the applicable penalty computation form (Form 2210, Form 2210-F, or Form 2220) for the given period.

  2. For specific waiver criteria please refer to the form specific instructions: IRC section 6654 for Form 2210 and Form 2210-F, and IRC section 6655 for Form 2220.

20.1.3.1.3.2.1  (06-23-2009)
Federally Declared Disaster Area

  1. IRC section 7508A provides that the Secretary of the Treasury may specify a period of up to one year which may be disregarded in determining whether a required action (such as paying estimated tax) was performed in a timely manner, IF the secretary determines that the taxpayer was affected by a Federally declared disaster area.

  2. The determination made by the Secretary (or his delegate) of who was affected, and the period specified to be disregarded, are published by public notices and news releases. The information can be found on IRS' web site using search key "disaster tax relief" . IRS employees can research this information on-line at http://www.icce.irs.gov/fema/ , and at http://serp.enterprise.irs.gov/databases/irm-sup.dr/disaster.dr/disaster-toc.htm .

  3. IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief.

  4. The following taxpayers also qualify for penalty relief due to Federally declared disaster areas; however, they must call the IRS disaster hotline at 1-866-562-5227 to request that relief:

    • Taxpayers whose books, records, or responsible tax professional are located within a disaster area, while the taxpayer's business (or residence in the case of individuals) is not.

    • Relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in a covered disaster area.

  5. If a taxpayer claims that a penalty should not have been charged due to the disaster, follow the instructions below.

    IF And Then
    TC 971 with action code 086, 087 or 688 is posted in the entity Any installment due date falls within the period between the TC 971 transaction date and the secondary date Explain that the disaster area was taken into consideration when we computed the penalty. Provide a copy of our computation.
    TC 971 with action code 086, 087 or 688 is not posted in the entity, or none of the period between the due date of the first installment and the return due date falls within the period between the TC 971 transaction date and the secondary date The zip code of the location where the taxpayer maintains its records and books (i.e. the responsible tax professional's address) is not specifically included in the IRS bulletin Explain that the taxpayer's address, or the area where the taxpayer's books and records were kept is not within the area identified by the Secretary (or his designee) as affected by the disaster, and that the penalty is correct
    TC 971 with action code 086, 087 or 688 is not posted in the entity, but part or all of the period between the first installment due date and the return due date falls within the published disaster period The taxpayer qualifies for relief under paragraph (4) above. See IRM 20.1.3.1.3.2.1(4). Advise the taxpayer to call the disaster hotline to self-identify as affected by the disaster. If qualified, TC 971 with the appropriate information will be input, and all penalties automatically recomputed.

    Note:

    When applicable, the disaster period is excluded in the computation by setting the penalty rate between the disaster start date and end date equal to zero.

20.1.3.1.3.3  (06-23-2009)
Bankruptcy

  1. IRC section 6658 prohibits the assertion of the estimated tax penalty on liabilities during the time the case is a pending bankruptcy proceeding if:

    1. The tax was incurred by the bankruptcy estate and the failure occurred pursuant to an order of the court finding probable lack of funds of the estate to pay administrative expenses; or

    2. The tax was incurred by the debtor before the earlier of the order for relief, or (in the case of an involuntary bankruptcy) the appointment of a trustee, and
      i. the bankruptcy petition was filed before the return due date (including extensions), or
      ii. the date for making the addition to the tax occurs on or after the day on which the petition was filed.

20.1.3.1.3.4  (06-23-2009)
Request for Abatement Due to an Erroneous Refund of Estimated Tax Credits

  1. If the taxpayer claims that an overpayment (credit elect) was refunded in error or if an estimated tax payment was erroneously refunded by the Service, the taxpayer may be entitled to have a portion of the penalty abated. Verify the taxpayer's statement by requesting the prior year return and reviewing account information. See LEM 20.1.3.1.3.4 for more information.

  2. If the penalty was assessed under IRC section 6655, the penalty may not simply be abated. See IRM 20.1.3.3.2.

20.1.3.1.4  (06-23-2009)
Denying the Request for a Waiver

  1. If the waiver is denied, send an 854C letter using paragraph "V" informing the taxpayer of the reason for denial and explaining his/her appeal rights. Input TC 290 for zero with blocking series 98 (without the original return) or with blocking series 99 (with the original return). Also use Reason Code 065 when denying an IMF penalty.

    Note:

    If the original return was electronically filed, do not use blocking series 98 unless the controlling DLN doc code is 47, 51 or 54. Instead, use blocking series 99 & attach the appropriate printed transcript (IMFOLR, BMFOLR, TRDBV, RTVUE or BRTVU), or graphic print for modernized e-file returns.

20.1.3.1.5  (06-23-2009)
Appealing the Penalty

  1. For a complete discussion of penalty appeals, refer to IRM 20.1.1.

20.1.3.2  (06-23-2009)
IRC Section 6654 — Individual Taxpayers & Fiduciaries

  1. IRC section 6654 provides for a penalty when individuals, estates and trusts (other than charitable trusts) underpay any required installment(s) of estimated income tax liabilities reportable on Forms 1040 (U.S. Individual Income Tax Return) and Forms 1041 (U.S. Fiduciary Income Tax Return).

  2. For taxable years beginning January 1, 1998, taxpayers are required to make estimated tax payments if the tax that will be shown on their return (or, if no return is filed, their tax liability), minus tax amounts withheld from wages during the year, is $1,000 or more. (Prior to January 1, 1998, the threshold was $500.)

  3. "Tax shown on the return" is defined in the instructions for Forms 2210 or Form 2210-F. In masterfile terms, it is the ES tax base amount reflected in the module. This amount should be equal to tax per taxpayer reduced by any amounts reflected with TC 768 and TC 766 carrying the same DLN as the return.

20.1.3.2.1  (06-23-2009)
Assertion Criteria

  1. Taxpayers make quarterly estimated tax payments to pay for income tax liabilities not paid through withholding.

  2. Taxpayers will not be charged a penalty for underpayment of estimated tax if they pay, in generally four equal installments, an amount at least equal to the required annual payment of estimated tax. Each installment consists of estimated tax paid by the due date for that installment, plus 25% of withheld tax. (Fewer than four installments may be required if the taxable year is a short taxable year. See IRM 20.1.3.2.1.1.8.)

  3. If taxpayers fail to pay estimated tax as required, a penalty for underpayment of estimated tax is generally assessed. However, see IRM 20.1.3.2.1.1.5, Annualized Income Installment Method, and IRM 20.1.3.2.1.4, Application of Estimated Tax Payments, Credits, and Withholding, for exceptions to the "equal installments" rule in (2) above.

  4. Under IRC 6654(e)(2), no estimated tax penalty will be imposed on taxpayers if for any tax year:

    1. they had NO tax liability for the preceding taxable year, and

    2. they were a citizen or resident of the United States throughout the preceding tax year, and

    3. the preceding taxable year was a 12 month year.

    Criteria "a)" above is considered met if the taxpayer did not file a return for the previous year, and the module is not in status 02 or 03.

  5. The exception in (4) above is available for individuals, estates, and trusts even if the prior year return originally showed a liability for tax.

  6. Master File cannot determine whether the taxpayer qualifies for the exception in (4) above after the original return is filed. Therefore, care should be taken to review the tax module for the succeeding year (if present) whenever tax for another year is reduced to zero. If a penalty was charged against the succeeding taxable year, and the taxpayer now qualifies for the exception under (4) above, the penalty should be manually abated and the taxpayer notified of the action.

20.1.3.2.1.1  (06-23-2009)
Determining the Required Annual Payment

  1. Taxpayers must pay the lesser of 90% of tax shown on the current year's return, or the specified percentage of the tax shown on the preceding taxable year’s return as their required annual payment.

  2. For taxpayers whose adjusted gross income in the preceding taxable year was $150,000 or less ($75,000 if married filing separately) the specified percentage is 100%.

  3. For taxpayers whose adjusted gross income in the preceding taxable year was in excess of $150,000 ($75,000 if married filing separate) the specified percentage is found in the table below.

    If the preceding taxable year began in: The specified percentage is:
    2002 or thereafter 110%
    2001 112%
    2000 110%
    1999 108.6%
    1998 105%
    1994 through 1997 110%

  4. In the case of an estate or trust, adjusted gross income is determined as provided in IRC section 67(e). See instructions for line 15b, Form 1041.

  5. Preceding taxable year’s tax refers to the tax shown on the taxpayer’s original return, or shown on an amended return for the previous year if filed prior to the due date for that year, including extensions.

    Note:

    Different rules applied to periods beginning prior to 1995. See Exhibit 20.1.3-3. See the specific Form 2210 instructions for rules specific to taxable years that began prior to 1987.

20.1.3.2.1.1.1  (06-23-2009)
Special Rule for Tax Periods Beginning in 2009

  1. Section 1212 of the American Recovery & Reinvestment Act of 2009, provides for a lower required annual payment for certain small business taxpayers.

  2. For tax periods beginning in 2009, small business taxpayers are required to pay only 90% (in lieu of 100% or 110%) of the preceding taxable year's tax if the following qualifications are met:

    1. The taxpayer's AGI must be less than $500,000 (less than $250,000 if married, filing separately).

    2. The taxpayer must certify that at least 50% of the AGI shown on the return was income from a small business.

    The requirements for the certification will be published in Publication 505 and 535, and in the Form 2210 instructions.

20.1.3.2.1.1.2  (06-23-2009)
Limitation on Using Preceding Taxable Year’s Tax

  1. Taxpayer’s may not use the preceding taxable year’s tax if either

    1. the preceding taxable year was not a taxable year of 12 months, or

    2. the taxpayer did not file a return for the preceding taxable year, even though required to do so.

20.1.3.2.1.1.2.1  (06-23-2009)
Changes in Filing Status

  1. Taxpayers filing jointly in one year, but separately in the other, cannot use the preceding year's tax without modification, when determining the lesser of current or prior year tax:

    • Taxpayers filing jointly, who filed separately in the preceding taxable year, are to add the two separate tax liabilities in the preceding year for the purpose of computing their required annual payment.

    • Taxpayers filing separately, who filed jointly in the preceding taxable year, are to compute their required annual payment by redetermining their separate share of the joint liability for the preceding year using each spouse's separate income and deductions based on the current year's filing status. For more information see Publication 505, chapter 4, General Rule.

20.1.3.2.1.1.2.2  (06-23-2009)
Short Taxable Year following a 12 month Year

  1. Taxpayers that are filing a short taxable year return for the current year, and that filed a return for a full 12 months for the prior year, may modify their prior year tax before using it to compute their required annual payment. The modification consists of dividing the prior year tax by 12, and multiplying the result by the number of months in the short taxable year.

  2. For the purpose of computing modified prior year tax, a partial month in the short taxable year is considered to be a full month.

    Example:

    Taxpayer "U" filed a full 12 month return for the taxable year 12/31/2007, and will be filing a final short taxable year return for the taxable year ending 08/12/2008. The 2007 tax was $18,000. The modified prior year tax, for use in computing the required annual payment for the short taxable year, is $12,000:
    $18,000 ÷ 12 = $1,500.
    $1,500 x 8 = $12,000.

20.1.3.2.1.1.3  (06-23-2009)
Nonresident Aliens

  1. For the purpose of the estimated tax penalty, a nonresident alien is an individual taxpayer who

    • is not a citizen of the United States;

    • is not a resident of the United States; and

    • whose wages not subject to federal income tax withholding.

  2. Nonresident aliens (as defined above) are required to make only three installments of estimated tax.

  3. Nonresident aliens who do not meet the above criteria are required to pay estimated tax the same as U.S. residents and citizens.

  4. Unless the nonresident alien taxpayer elects to annualize his income, the amount due with the first installment is 50% of the required annual payment. The amounts due each with the second and third installment is 25% of the required annual payment.

  5. If the taxpayer annualizes his income, the amount due with each installment is to be based on his income and deductions as of the end of the month preceding the month containing the due date of the installment.

  6. In general, in the case of a calendar year individual, the installment requirements are:

    Due Dates: Amount Due
    June 15 50% of required annual payment
    September 15 25% of required annual payment
    January 15 of following year 25% of required annual payment

  7. Non-resident alien taxpayers are subject to the same rules governing the use of prior year tax (in determining their required annual payment) as outlined in IRM 20.1.3.2.1.1, and IRM 20.1.3.2.1.1.1.

20.1.3.2.1.1.4  (06-23-2009)
Deceased Taxpayers

  1. A penalty for underpayment of estimated tax by a decedent is charged only for installments due prior to the date of death. The penalty is computed on any underpayment from the installment due date to the earlier of the date paid, or the date of death.

  2. A joint return is not considered to be the return of a decedent unless both spouses are deceased. If both spouses are deceased, the date of death for the purpose of computing the penalty is the latter of the two dates of death.

20.1.3.2.1.1.5  (06-23-2009)
Fiduciaries of Estates or Trusts

  1. All estates and most trusts are required to make estimated tax payments in the same manner as individuals.

    Exception:

    Charitable trusts and any private foundation organized as a trust, will be subject to the corporate estimated tax provisions under IRC section 6655, rather than IRC section 6654.

  2. Generally, an estate or trust is required to pay estimated tax if it expects to owe, after credit for withholding, an amount greater than $1,000 ($500 for tax years beginning before 1998). For details and exceptions, see Form 1041–ES, Estimated Income Tax for Estates and Trusts, for the given year. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to figure any penalty.

  3. The following are exempt from paying estimated tax for tax years ending before two years from the date of death:

    • Decedents' estates;

    • Grantor trusts that receive the residual of a probate estate under the decedent's will; and

    • For tax years beginning after December 31, 1986, if there is no will to probate, a trust that is primarily responsible for paying taxes, debts and expenses of administration.

  4. Fiduciaries may elect to treat any portion of estimated tax payments made by the trust or estate as payments made by a beneficiary. Such an amount is treated as a payment of the estimated tax made by the beneficiary on January 15 following the close of the taxable year. Fiduciaries must make these elections on Form 1041–T, Transmittal of Estimated Taxes Credited to Beneficiaries. These elections must be filed on or before the 65th day after the close of the trust's taxable year. [ IRC section 643(g) ]

20.1.3.2.1.1.5.1  (06-23-2009)
Qualified Funeral Trust

  1. Generally, a Qualified Funeral Trust (QFT) must pay estimated income tax if it expects to owe, after subtracting withholding and credits, at least $1,000 in tax. However, the estimated tax liability is figured for the individual QFT, and not for a composite return as a whole.

    Example:

    Trustee "X" files a composite Form 1041-QFT reporting $4,500 in total tax. The tax is allocated to three individual QFTs in the amounts of $800, $900 and $2,800. As such, only one individual QFT has an estimated tax liability, which is the lesser of 90% of its current year liability (90% of $2,800) and 100% of its prior year liability (if applicable). The estimated tax penalty for the composite return would be based on the estimated tax liability of the one individual QFT.

  2. For additional information see LEM 20.1.3.2.1.1.4.1.

20.1.3.2.1.1.6  (06-23-2009)
Annualized Income Installment Method

  1. Taxpayers who do not receive income evenly throughout the year (for example, taxpayers involved in seasonal businesses) may use the annualized income installment method for determining estimated tax payments. This method allows estimated payments that actually reflect the income earned in the period immediately before the installment due date.

  2. Form 2210 includes Schedule AI which is used to determine the required installments using the annualized income installment method. Annualized income installment is computed by placing on an annualized basis the income for months in the taxable year ending on the last day of the month before the due date for the installment. For a calendar year taxpayer this means the income will be annualized from the first of January for each installment period:

    Installment Due On Income & Deductions Annualized
    From To
    # 1 April 15 Jan. 1 March 31
    # 2 June 15 Jan. 1 May 31
    # 3 Sept. 15 Jan. 1 August 31
    # 4 next Jan. 15 Jan. 1 Dec. 31

  3. Estates and trusts electing to use the annualized income installment method have the same estimated tax payment due dates as other individuals. However, the installment is computed by placing on an annualized basis the income for months in the taxable year ending the second month preceding the month that contains the due date for the installment. This means that for a calendar year taxpayer income is annualized as follows:

    Installment Due On Income & Deductions Annualized
    From To
    # 1 April 15 Jan. 1 Feb. 28 or 29
    # 2 June 15 Jan. 1 April 30
    # 3 Sept. 15 Jan. 1 July 31
    # 4 next Jan. 15 Jan. 1 Nov. 30

    Note:

    Because income received in December is not included in annualized income of an estate or trust, the required annual payment of an estate or trust can be less than both 90% of current year tax and 100% of prior year tax. This will be the case when the taxpayer chooses to annualize, and taxable income received through November 30th is less than 11/12 of total taxable income for the year.

  4. If the annualized income installment method is used for one installment, and the regular method is used for the next installment, any reduced amount realized under the annualized installment versus the regular method installment, must be made up in the following regular method installment. (The annualized worksheet included in the "Instructions for Form 2210" package, as well as Schedule AI, Form 2210, recaptures any shortfall.)

  5. For tax years 1992 and later, taxpayers must complete Form 2210, including Schedule AI, and attach them to their return if they used the annualized income installment method to compute their required installment amounts.

20.1.3.2.1.1.7  (06-23-2009)
Farmers and Fishermen

  1. Taxpayers with at least two-thirds of their gross income derived from farming or fishing, in the current or preceding taxable year, are required to either:

    1. Make a lump sum estimated tax payment by the 15th day of the month following the close of the tax year (January 15 for calendar year returns); or

    2. File their return and pay the total tax due by the first day of the third month following the close of the tax year (March 1 for calendar year returns).

  2. See Publication 225, Farmer's Tax Guide, and Publication 595, Capital Construction for Commercial Fishermen, for the definition of gross income.

  3. See Exhibit 20.1.3-4. This exhibit contains specific instructions for computing 2/3 of gross income, as well as a list of income items that qualify as income from farming or fishing.

  4. See LEM 20.1.3.2.1.1.6 for additional information.

  5. For qualifying farmers and fishermen, the required annual payment is the smaller of:

    1. 66 2/3 percent of the current year's tax; or

    2. 100 percent of the total tax shown on the preceding year's return (assuming the return covered a full 12 months).

  6. For joint returns, the spouse's income must be considered in determining if the taxpayer meets the two-thirds gross income from farming or fishing requirement.

  7. If a taxpayer qualifies as a farmer or fisherman, an indicator is placed on the taxpayer's file. The indicator will be shown on IDRS response screens for command codes TXMOD, PIEST, and IMFOL. See IRM 2.3.11 for TXMOD, IRM 2.3.41 for PIEST, and IRM 2.3.51 for IMFOL.

20.1.3.2.1.1.8  (06-23-2009)
Short Taxable Years

  1. Individual taxpayers may file a short period return due to a change in accounting period or due to a change in accounting methods. Two short period returns may also be filed during a single taxable year if the taxpayer enters bankruptcy during the taxable year.

  2. The first and/or final return filed by or for an individual (i.e. for an individual who was born or who died during the taxable year), including early filed decedent returns, are not short taxable year returns. They are considered to be for a full taxable year of twelve months. However, special rules apply to decedent returns. See IRM 20.1.3.2.1.1.4.

  3. Trusts and estates may file an initial short taxable year return, or a final short termination year return. Prior to 1987 a trust might also have filed a short year return due to a change in accounting periods.

  4. A bankruptcy estate may also elect to end its taxable year early in order to determine its tax liability prior to closing of the bankruptcy.

  5. Taxpayers filing a short year return generally are required to make estimated tax payments.

  6. The amount of each required installment may be determined using the annualized income installment method.

  7. If the annualized income installment method is not used, the required annual payment generally must be paid in equal installments. The fraction due with each equal installment is determined by dividing the required annual payment by the number of installments due.

    Exception:

    Non-resident alien taxpayers' first installment generally is not due until the 15th day of the 6th month. The amount due with this installment is twice the amount that would normally be due, unless only one installment is due for the short taxable year.

  8. For the annualized income installment method, the multipliers for lines 2 and 5 of Schedule AI are determined by dividing the number of months in the tax period by the number of months that precede the due date of the given installment.

  9. Exception for estates and trusts using the annualized method: The multipliers for lines 2 and 5 of Schedule AI are determined by dividing the number of months in the tax period by the number of months that precede the due date of the given installment by one month or more.

20.1.3.2.1.1.8.1  (06-23-2009)
Short Year Installment Due Dates

  1. Notice 87-32 provides that a trust or estate that has a short taxable year (that is, a period of less than 12 months) must pay installments of estimated tax on or before-

    1. the fifteenth day of the fourth month of such taxable year,

    2. the fifteenth day of the sixth month of such taxable year,

    3. the fifteenth day of the ninth month of such taxable year, and

    4. the fifteenth day of the first month of the succeeding taxable year.

    The payments due in the fourth, sixth and/or ninth month of the short taxable year (but not the payment due on the fifteenth day of the first month of the succeeding taxable year) are not required to be paid if the short taxable year ended during or prior to such fourth, sixth and/or ninth months. See Exhibit 20.1.3-1. Tables 2 and 3.

  2. For a short taxable year in which a trust or estate subject to section 6654 terminates, installments of estimated tax must be paid for any installment due before the last day of the short taxable year and a final installment must be paid by the fifteenth day of the first month following the month in which the short taxable year ends. See Exhibit 20.1.3-1. Table 3.

  3. The guidance in Notice 87–32 may not be inferred to apply to entities other than trusts and estates.

  4. Individuals in general are required to pay their estimated tax on or before the 15th day of the fourth, sixth and ninth month of the taxable year, and on or before the 15th day of the first month of the succeeding taxable year. However, no official guidance has been given concerning the application of these due dates in the case of a short taxable year. Therefore, a penalty will not be charged if the taxpayer paid at least the required annual payment in a manner that is consistent with published guidelines.

  5. If a taxpayer has paid less than the required annual payment, then (unless the taxpayer has established other reasonable due dates via payment of estimated tax) the penalty shall be computed using due dates based on the ending month of the taxpayer's fiscal or calendar year in effect for the year in question.

    Example:

    1) Mr. "A" has been a fiscal year filer with a fiscal year ending June 30. However, he is electing to change his accounting period to a calendar year in order to be able to file jointly with Mrs. "A" , a calendar year filer. Mr. "As " final fiscal return is for a short taxable year ending on 12/31/2008. However, because it is the final fiscal year return, the installment due dates will be based on the fiscal year ending June 30, for all months falling within the short taxable period, plus the 15th day of the first month following the close of the short taxable year: 15th day of the 4th month = October 15, 2008; 15th day of the 6th month = December 15, 2008; 15th day of the first month following the close of the taxable year = January 15, 2009.

    Example:

    2) Mr. "B" , a calendar year filer, files for bankruptcy protection on June 20, 2008. Because his business, "C Notes & More" , is turned over to a bankruptcy trustee, Mr. "B" elects under IRC section 1398(d) to end his year early, splitting his taxable calendar year into two short taxable years: The first short year ending on June 19, 2008, and the second short year beginning on June 20, 2008. The estimated tax installment due dates for the first short year are those due dates that fall within the short year, plus the 15th day of the first month following the close of the short year: April 15, 2008, June 15, 2008, and July 15, 2008. The estimated tax installment due dates for the second short year are those dates that are after the first month in that short taxable year: September 15, 2008 and January 15, 2009. Please note, however, that an estimated tax penalty generally is not charged for the first short taxable year in this situation. See IRM 20.1.3.1.3.3.

20.1.3.2.1.2  (06-23-2009)
Period(s) of Underpayment

  1. If a taxpayer fails to pay as much estimated tax as required for any installment, an underpayment exists. The underpayment period for that installment begins on the due date of the underpaid installment, and ends on the earlier of —

    1. the date the installment is paid; or

    2. the 15th day of the 4th month following the end of the taxable year.

  2. In determining underpaid installments, the earliest liability must be paid in full before payments may be applied to later installments [ IRC section 6654(b)(3)].

  3. Timely mailing equals timely paying: A payment that is mailed on or before its due date is considered made on the due date, even if it is received after the due date. See LEM 20.1.3.2.1.2.

  4. The period of underpayment must be computed separately for each installment, beginning with the first installment. See Exhibit 20.1.3-5. for an example of how the period of underpayment is computed.

  5. The Perpetual or Leap Year Julian Date Calendars may be used to compute the number of days in each underpayment period.

20.1.3.2.1.3  (06-23-2009)
Payment Due Dates

  1. Installments of estimated tax (other than for non-resident aliens and qualifying farmers and fishermen) are due on the 15th day of the 4th, 6th, and 9th month of the current taxable year (as applicable), and on the 15th day of the 1st month of the following taxable year. For a calendar year filer, the due dates are April 15, June 15, September 15, and January 15 of the following year.

  2. Taxpayers are not required to make their final estimated tax installment if they file their return and pay their tax on or before the last day of the first month following the close of their taxable period. (See LEM 20.1.3.2.1.3.)

  3. Taxpayers who qualify as farmers or fishermen ( See IRM 20.1.3.2.1.1.7.) are required to make only one estimated tax payment due on the 15th day of the first month following the close of the taxable year.

  4. Farmers and fishermen are not required to make any estimated tax payments if they file their return and pay their tax on or before the first day of the third month following the close of the taxable year. (See LEM 20.1.3.2.1.3.)

  5. If an installment due date falls on a Saturday, Sunday or legal holiday, payments made the next business day are considered paid on the due date. [ IRC 7503]

  6. See IRM 20.1.3.2.1.1.3. for due dates for non-resident aliens.

  7. See IRM 20.1.3.2.1.1.8.1. for due dates for short taxable years.

20.1.3.2.1.4  (06-23-2009)
Application of Estimated Tax Payments, Credits and Withholding

  1. Payments and credits are applied to liabilities in the order they are received (credit availability date), beginning with the earliest liability. [ IRC section 6654(b)(3)]

  2. Credit for withheld income tax is divided equally among the required installments. Exception: at the taxpayer's election, withholding may be applied to the liability that corresponds to the period during which the tax was actually withheld. [ IRC section 6654(g)]

  3. Taxpayers electing to allocate their withholding in accordance with paragraph (2) are required to complete Form 2210 and attach it to their return.

20.1.3.2.1.5  (06-23-2009)
Determining Amount of Underpayment

  1. The underpayment of an installment is the amount by which the required installment exceeds credits and payments available for that installment on the due date of the installment.

  2. There is more than one correct method for computing the amount of the underpayment for a given period. See IRM 20.1.3.1.1.1.

20.1.3.2.1.6  (06-23-2009)
Penalty Rate

  1. Although the estimated tax penalty is not interest, it is computed in the same manner as interest, except it is NOT COMPOUNDED DAILY. Use the debit interest rate in effect for the appropriate time period.

  2. The rate which applies during the 3rd month following the close of the taxable period also applies for the first 15 days of the 4th month. For example, for tax year ending December 31, 2008, the debit interest rate in effect during the first quarter of 2009 will also be used for the period April 1, 2009 through April 15, 2009, regardless of whether the interest rate is changed for the second quarter of 2009.

  3. In accordance with IRC section 6621, the debit interest rate is determined for the first month of each calendar quarter, and is applied to each month within that quarter.

  4. Interest rates can be found in the Internal Revenue Bulletin (IRB), News Releases, TAX NEWS, Servicewide Electronic Research Program (SERP) and Notice 746, Information About Your Notice, Penalty and Interest.

20.1.3.2.1.7  (06-23-2009)
Determining the Penalty Amount

  1. The penalty is computed by applying —

    1. the underpayment rate established under IRC section 6621,

    2. to the amount of the underpayment,

    3. for the period of the underpayment.

    In effect, the penalty is the sum of the penalties for each day during which an underpayment exists. The penalty for each day is computed by multiplying the daily rate by the underpayment amount. The daily rate is the rate determined under IRC section 6621 divided by the number of days in the calendar year.

  2. IDRS command code COMPA with definer "S" has been provided to aid in the computation of the penalty. See IRM 20.1.3.1.1.1.

  3. The penalty is always computed based on the tax shown on the original return, or on an amended (superseding) return filed on or before the due date for filing. Masterfile is only able to automatically compute the estimated tax penalty based on the first posted return in a tax module. Therefore, the penalty must be manually computed and adjusted when a superseding return is processed, or when the first return posted in the module posted there in error.

  4. Tax shown on the return is defined as "total tax per taxpayer" (except that portion of tax attributable to Form 8828), reduced by most refundable credits, including credit for withheld income tax. (See Form 2210 instructions for details.) Credit elect, estimated tax payments and other payments, special tax rebates and refunds (including the credit for telephone excise tax in 2006), are not included when computing tax shown on the return.

    Note:

    If tax per taxpayer differs from tax as corrected during processing (such as when there is a math error on the return), the computer will use the lesser of the two amounts when computing total tax shown on the return for ES penalty purposes.

  5. Because the penalty is based on original tax and actual payments, the penalty must be recomputed if there is a change to withheld income tax, or to payments or credits available before the due date for payment. In most instances the penalty will automatically recompute. However, if ES penalty computation in the module is restricted (TC 170 or 171 with doc code 17, 18, 24, 47, 51 or 54), the penalty must be manually computed and adjusted.

  6. When adjusting withheld income tax in a module where ES penalty is restricted, the ES penalty must be addressed as part of the adjustment. Failure to address the penalty will cause the adjustment to unpost. The penalty is addressed by correcting the assessed penalty with TC 170 to increase the penalty, or with TC 171 to decrease the penalty. If the penalty is already correct as assessed, it may be addressed by entering priority code 8 with the withholding adjustment.

  7. Follow the rules in LEM 20.1.3.2.1.7 when adjusting the ES penalty.

20.1.3.2.1.7.1  (06-23-2009)
Form 2210 or 2210-F

  1. Taxpayers may file Form 2210 or Form 2210–F to compute their penalty. The forms may be filed with a return, or after the IRS has notified the taxpayer of a penalty assessment.

  2. Taxpayers are required to file Form 2210 with their return if they—

    1. request a waiver of the penalty;

    2. used the annualized income installment method to figure the required amounts of their installments;

    3. report income tax when it was actually withheld, instead of dividing it equally among required installments;

    4. filed jointly in either the current or prior taxable year, but not in both. (Only page 1 is required to be filed.)

  3. Forms filed with the taxpayer's return will be processed in accordance with the applicable IRM.

  4. Loose forms, and forms received with an amended or superseding return must be manually verified before the taxpayer's figures are accepted. See LEM 21.1.3.2.1.7 for special instructions.

  5. When verifying Form 2210–F, care should be taken to assure that the taxpayer qualifies to use that form. See IRM 20.1.3.2.1.1.7.

  6. When verifying either Form 2210 or Form 2210–F, compare the tax shown on the original returns (or superseding return(s), if applicable) with the amounts used in the taxpayer's computation. Remember, the penalty is computed based on original tax!

  7. Tax (for the purpose of computing the estimated tax penalty) is figured using the tax and credits as outlined in the Form 2210 instructions.

  8. Special rules apply for figuring "tax shown on prior return" if the taxpayer filed jointly in one year but not both. See IRM 20.1.3.2.1.1.2.1., Changes in Filing Status.

  9. IRS employees may use Form 2210 or Form 2210–F as a worksheet when computing the penalty for underpayment of estimated tax.

20.1.3.2.1.7.1.1  (06-23-2009)
Verifying Credits on Master File

  1. Credits claimed by the taxpayer in his computation should be verified. This can be done using the appropriate CFOL or IDRS command codes (i.e. IMFOL or TXMOD). Review both the dollar amounts and the received dates of any payments. Do not use the taxpayer's figures if they do not match posted data. Remember that an installment that is mailed on or before its due date is considered paid on the earlier of the date it is received, or the due date for the installment. See LEM 20.1.3.2.1.2(3).

  2. The net amount of all TC 80X transactions in a module reflects the total credit for withheld income tax posted in the module.

  3. Unreversed TC 716 and 710 transactions in a module reflect credit elect from other periods posted in the module. (TC 712 reverses TC 710 and 716 in whole or in part.)

  4. Unreversed TC 430 and 660 transactions reflect estimated tax payments made with Form 1040–ES or Form 1041–ES estimated tax payment vouchers.

  5. Unreversed TC 670 transactions reflect payments received without a voucher or other designating statement.

  6. See Document 6209 for explanations of other payments or credits that may be posted in the module.

  7. Remember that all payments or credits dated earlier than the return due date (without regard to extensions) need to be considered in any penalty computation.

  8. If the taxpayer claims that a payment or credit was misapplied, and the payment or credit is located and available, then correct the account as part of your action. However, if the missing payment or credit was refunded to the taxpayer in error, then the taxpayer may qualify for a waiver of all or part of the penalty. See IRM 20.1.3.1.3.4. This includes credits applied to other liabilities, which are subsequently refunded due to subsequent posting of a payment made by the taxpayer. It does not include credits applied to other liabilities which were legally owed when the credit was applied.

20.1.3.2.1.7.2  (06-23-2009)
Substitute For Return

  1. When a taxpayer fails to file a return for any year for which he is required to file, the Secretary is authorized to file a Substitute for Return (SFR) on the taxpayer's behalf under IRC section 6020(b). For income tax returns, the assessment of tax determined to be due on such a substitute return is made after the service has issued a notice of deficiency which explains the taxpayer's appeal rights.

  2. When a taxpayer has not filed a return, then the estimated tax penalty is based on the lesser of —

    1. 90% of the tax for the current year (rather than tax shown on the return for the current year), or

    2. 100% of the tax shown on the previous year's return. (This does not apply if the taxpayer has not filed a return for the previous year, or if the return for the previous year was not for 12 months. However, See IRM 20.1.3.2.1.)

  3. Taxpayers who disagree with an SFR assessment often will file their own return showing a lesser amount of tax. The IRS is not obligated to consider such a return unless that taxpayer has previously paid the SFR assessment. However, in the interest of customer service and burden reduction, the IRS will generally consider on its merit any return filed by the taxpayer.

  4. When an SFR assessment is adjusted (increase or decrease) after an SFR assessment (including if based on the taxpayer's own return), the estimated tax penalty may be required to be manually adjusted based on the revised tax for the year. (See paragraph (2) above.)

20.1.3.2.1.7.3  (06-23-2009)
Household Employment Taxes & Estimated Tax Penalty

  1. Household employment taxes (Schedule H), without consideration of credit for advance earned income credit paid, are includible in tax shown on the return unless —

    1. the taxpayer has no credit for withheld income tax, and

    2. the total tax shown on the return (excluding Schedule H tax) is less than $1,000.

  2. IRC section 3510(b)(2) provides that household employers who are not subject to income tax withholding, and who are not otherwise required to make estimated tax payments, will not be subject to the estimated tax penalty solely by reason of having to include household employment tax on their return.


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