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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  (09-12-2006)
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.

20.1.3.1.1  (09-12-2006)
Individual (& Fiduciary) Estimated Tax Penalty (IRC Section 6654)

  1. IRC section 6654 provides for a penalty when individuals, estates and most 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 not subject to estimated tax penalties if the tax shown on their return (or, if no return is filed, their tax liability), minus tax amounts withheld from wages during the year, is less than $1,000. Prior to January 1, 1998, the threshold was $500.

20.1.3.2  (09-12-2006)
Assertion Criteria

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

  2. Taxpayers must make estimated tax payments if the tax shown on their return (or, if no return is filed, their tax liability), minus withholding from wages during the year, will be $1,000 or more ($500 for tax years beginning before January 1, 1998) unless an exception in IRM 20.1.3.2.1 applies.

  3. Taxpayers who underpay estimated tax may be subject to a penalty.

  4. To avoid the estimated tax penalty under IRC section 6654, taxpayers with adjusted gross income equal to or less than $150,000 ($75,000 for married individuals filing separately) are required to pay annual estimated tax including withholding the lesser of: (a) 90 percent of the tax shown on the current year's return; (b) if no return is filed, then 90 percent of the tax required to be shown on the current year's return, or (c) 100 percent of the tax shown on the preceding year's return (if a return was filed, and if the preceding year was a full year).

  5. Taxpayers with adjusted gross income in excess of $150,000 ($75,000 if married filing separate) must pay 110 percent of the tax shown on the of the preceding year's tax return.

  6. In the case of an estate or trust, adjusted gross income will be determined as provided in IRC section 67(e) (relating to the 2 percent floor for miscellaneous itemized deductions).

20.1.3.2.1  (09-12-2006)
Determining the Required Annual Payment

  1. No estimated tax penalty will be imposed if the tax shown on the taxpayers' return minus tax amounts withheld from wages during the year is less than $1,000 ($500 for years beginning before January 1, 1998).

  2. No estimated tax penalty will be imposed on taxpayers if for any tax year:

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

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

    3. The preceding tax year was a 12-month year.

  3. The exception in (2) above is available for individuals, estates, and trusts even if the prior year return shows a liability for tax.

  4. Master File usually can determine whether the taxpayer qualifies for this exception. The computer will assess the penalty if the taxpayer incorrectly claims this exception.

20.1.3.2.1.1  (09-12-2006)
Payments Based on Prior Year's Tax

  1. Generally, taxpayers may base their annual estimated tax amounts on 100 percent of the preceding year's tax. For this method of computing estimated tax to apply, the preceding tax year must have covered a full 12 months.

    1. The preceding year's tax for purposes of estimated tax payments refers to the tax assessed with the original or amended returns.

    2. The preceding year's tax does not include tax increases or decreases from amended returns or audits after the return due date (including extensions). See, however, the exceptions to this rule in IRM 20.1.3.2.7.

20.1.3.2.1.2  (09-12-2006)
Non-resident Aliens and U.S. Citizens Residing or Living Abroad

  1. Non-resident aliens (other than those whose U.S. wages are subject to withholding) are required to make three installments of estimated tax. In the case of a calendar year individual, the installment requirements are:

    Due Dates:   After 12/31/85
    1 June 15   50 percent
    2 Sept. 15   25 percent
    3 Jan. 15 of the following year   25 percent

  2. For taxable years beginning after December 31, 1993, nonresident aliens are subject to the same limitations as in IRM 20.1.3.2.1.1, Payments Based on Prior Year's Tax.

20.1.3.2.1.3  (09-12-2006)
Deceased Taxpayers

  1. Deceased taxpayers are liable for estimated tax payments due on installment due dates occurring prior to the date of death. The penalty is computed on underpaid installments from their due date to the earlier of the date paid or the date of death.

20.1.3.2.1.4  (09-12-2006)
Fiduciaries of Estates and Trusts

  1. Effective for tax years beginning after December 31, 1986, all estates and most trusts are required to make estimated tax payments in the same manner as individuals. NOTE 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. The following are exempt from paying estimated tax for tax years ending before two years from the date of death:

    1. Decedents' estates,

    2. Grantor trusts that receive the residual of a probate estate under the decedent's will, and

    3. 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.

  3. 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 of the year following 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 tax year. [IRC section 643(g)]

  4. 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. Estimated tax liability is figured for the individual QFT, and not for a composite return taken as a whole. For details and exception, see Form 1040-ES Estimated Income Tax for Estates and Trusts. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to figure any penalty.

20.1.3.2.1.5  (09-12-2006)
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 installment income 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. Form 2210 includes Schedule A1 which is used to determine the required installments using the annualized income installment method.

  2. 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. This means the income will be annualized from the first of January for each installment period. For example:

      Installment Due Income Annualized From Through
    1 4/15 1/01 3/31
    2 6/15 1/01 5/31
    3 9/15 1/01 8/31
    4 1/15 1/01 12/31

  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 before the date one month before the due date for the installment. This means that income is annualized as follows:

      Installment Due Income Annualized From Through
    1 4/15 1/01 2/28
    2 6/15 1/01 4/30
    3 9/15 1/01 7/31
    4 1/15 1/01 11/31

  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 A1, Form 2210, recaptures any shortfall.)

  5. For tax years 1992 and later, taxpayers must complete Schedule A1 of Form 2210 and attach the Form 2210 to their return.

20.1.3.2.1.6  (09-12-2006)
Farmers and Fishermen

  1. Taxpayers with at least two-thirds of their gross income derived from farming or fishing, (see Publications 225, Farmer's Tax Guide, and 595, Capital Construction for Commercial Fishermen, for defining gross income) in the current or preceding tax year (see Exhibits 20.1.3–4 and 20.1.3–5) 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).

    3. See LEM 20.1.3.2.1.6.

  2. 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 all 12 months).

  3. 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.

  4. If a taxpayer qualifies as a farmer/fisher, an indicator is placed on the Taxpayer Information File (TIF). The indicator will thereafter appear on IDRS screens for CC TXMOD, CC PIEST, CC ACTRA, CC MFTRA, CC IMFOL, RTVUE and/or other transcripts as they are developed.

20.1.3.2.2  (09-12-2006)
Period of Underpayment

  1. Taxpayers are generally required to pay 25 percent of their annual required payment on or before each installment payment due date (see Exhibit 20.1.3–2).

  2. The underpayment period is determined by the number of days from the installment payment due date to either:

    1. The date on which the underpayment is paid (see LEM 20.1.3.2.2), or

    2. The 15th day of the 4th month following the close of the taxable year (due date of return without regard to extensions), whichever is earlier.

  3. Each underpaid installment period must be separately computed.

20.1.3.2.3  (09-12-2006)
Payment Due Dates

  1. Most taxpayers make estimated tax payments in four installments. For calendar year returns, the due dates are:

    a. 1st installment April 15th
    b. 2nd installment June 15th
    c. 3rd installment September 15th
    d. 4th installment January 15th of the following year

  2. For fiscal year returns, the installment due dates are the 15th day of the 4th, 6th, and 9th months of the tax year with the fourth installment due on the 15th day of the 1st month following the close of the fiscal year. See Exhibit 20.1.3–1.

  3. If an installment due date falls on a Saturday, Sunday or legal holiday, payments received the next business day are considered paid on the due date. (NOTE: Throughout this text the term "payments received" equates to payments made in accordance with IRC section 7502 regarding the " timely mailing, timely filing" rule.)

  4. To calculate the number of days, see the Perpetual and the Leap Year Julian Date Calendars.

  5. Taxpayers do not have to make the fourth installment payment if they file their return and pay the tax due on or before the last day of the 1st month following the end of the tax year (for calendar year taxpayers, this would be January 31). See IRC section 6654(h).

20.1.3.2.4  (09-12-2006)
Application of Estimated Tax Payments, Credits and Withholding

  1. Credits claimed on Forms 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, or 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, must be verified against the taxpayer's account record. This can be done by checking the appropriate CFOL, IDRS (i.e. CC TXMOD), or MRS transcripts. Review both the payment dollar amounts and the received dates on the taxpayer's record. Consider only payment amounts credited to the taxpayer's account on or before installment payment due dates.

  2. See LEM 20.1.3.2.4.

20.1.3.2.4.1  (09-12-2006)
Credits Applied Within The Tax Year

  1. Installment payments are applied against the earliest underpayment within a tax period, regardless of the date the payment was received. When the first installment is satisfied, any excess will be applied to the next installment until all liabilities within a given tax period are satisfied.

20.1.3.2.4.2  (09-12-2006)
Credits From a Prior Year

  1. TC 716 or 710 (overpayment arising on or before the due date of the prior year's return) are applied against the first required installment of the next year's estimated tax unless the taxpayer notifies the Service by means of a statement attached to his income tax return, that the overpayment should be applied to another installment.

20.1.3.2.4.3  (09-12-2006)
Withholding

  1. Withholding is divided evenly among the four installments, unless the taxpayer notifies the Service to apply the withholding to the installment in which it was actually withheld. If the withholding is to be treated as paid when it was actually withheld, the taxpayer must complete and attach Form 2210 to the return.

20.1.3.2.4.4  (09-12-2006)
Additional Payment Information

  1. If the taxpayer claims IRS did not properly credit the account, review the canceled check, bank data, or other information the taxpayer provides about the payment(s). Determine if the payment(s) in question posted correctly to the account.

  2. If the payment has not posted to the account, follow functional procedures for tracing payments. If the payment posted after the penalty assessment and the penalty was manually assessed (TC 170), recompute the penalty using the latest payment information.

  3. If there is a change in the taxpayer's withholding taxes allowable as a credit under IRC section 31 and/or the estimated tax payments, the penalty MUST be corrected even though the affected taxpayer does not request the correction.

  4. If the penalty was manually computed or there is otherwise a restricting condition in the module, manually recompute the penalty using the new credit/payment amounts. The computer will automatically recompute estimated tax penalty when an adjustment to TC 806 or TC 807 is made and there are no restrictive conditions, such as TC 170/171, in the module, or when TC 43X, 61X, 62X, 66X, 67X, 700, 702, 71X, 760, 762, or 97X posts prior to the return due date, also assuming there are no restrictive conditions in the module.

  5. If the taxpayer claims that he elected to apply a prior year's overpayment to the current year's estimated tax, but the overpayment was refunded in error, request a copy of the prior year return from the taxpayer. If the taxpayer's statement is verified, the taxpayer may be entitled to have a portion of the penalty abated. Also, if the taxpayer made an estimated tax payment that was erroneously refunded by the Service, they may be entitled to have the penalty or a portion thereof abated. See IRM 20.1.3.4.1.5.

20.1.3.2.4.5  (09-12-2006)
Verifying Credits on Master File

  1. Credits claimed by the taxpayer should be verified. This can be done by checking the appropriate CFOL, IDRS (i.e. TXMOD), or MRS transcripts. Review both the dollar amounts and the received dates of any payments.

  2. TC 800 or TC 806 credits a tax module for the amount of withholding taxes claimed on a Form 1041.

  3. TC 710 or TC 716 credit is a "credit elect" overpayment received from the prior tax period. It will be applied as a credit to the first required installment period unless the taxpayer instructs the Service to apply it to another installment.

  4. TC 660 deposits are made using an 8109 or 8109-B deposit coupon. This deposit will post to the tax module with the date the payment was received at the Federal Depositary.

  5. TC 670 subsequent payments will be credited to a tax period with the received date of that payment.

  6. TC 610 is a payment that is received with the return. This payment will also post to the tax module with the date the payment was received.

20.1.3.2.5  (09-12-2006)
Determining Amount of Underpayment

  1. The amount of the underpayment is the required installment payment minus the amount (if any) paid or credited on or before the due date of the installment.

20.1.3.2.6  (09-12-2006)
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.

    1. In accordance with IRC section 6621, the debit interest rate is determined quarterly. This means that the penalty on a $1,000 underpayment for one quarterly tax period may be different from the penalty on a $1,000 underpayment for a different quarterly tax period.

    2. 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.

  2. RATE EXCEPTION UNDER IRC SECTION 6621(b)(2)(B): The rate which applies during the 3rd month following the taxable year also applies for the first 15 days of the 4th month. For example, for tax year ending December 31, 2005, the debit interest rate in effect during the first quarter of 2006 will be used for the period April 1 through 15, regardless of interest rate determined for the second quarter of 2006.

20.1.3.2.7  (09-12-2006)
Determining the Penalty Amount

  1. For each installment, the penalty is determined by multiplying:

    1. The penalty rate (is the same as the underpayment (debit interest) rate established under IRC section 6621. That rate is a simple interest rate that is NOT compounded daily).

    2. By the amount of the underpayment,

    3. For the period of underpayment. (The period of underpayment begins on the due date of the installment and ends with the earlier of payment received date or due date of the return without regard to extensions, usually April 15th of the following year. NOTE: THIS IS A PENALTY and cannot be claimed as a deduction or business expense on any return.)

  2. See LEM 20.1.3.2.7.

  3. Estimated tax penalties are computed on the amount of tax reported on the original return. A second return filed on or before the due date of the return is considered an original return.

  4. If an adjustment is made to the tax of an original return, including extensions, as a result of either an audit or the taxpayer filing an amended return (Form 1040X) before the due date the penalty amount may be adjusted, based on the new tax amount.

  5. If an adjustment is made to the tax of an original return, after the return due date, including extensions, as a result of either an audit or the taxpayer filing an amended return (Form 1040X), the penalty amount will generally (see the following exceptions) not be adjusted.

    1. If an amended joint return is filed after separate returns (i.e. an individual files joint return after filing a separate return for a taxable year in which they could have filed a joint return), the estimated tax penalty is based on the joint return. This is the case, even if it is filed after the time for filing the return (including extensions), as long as a joint return is filed before the expiration of the statute of limitations. For additional information refer to IRM 21.6.7.4.6, "Interest and Penalty Considerations."

    2. If there is a math error on the return, the computer is programmed to compute the penalty on the lesser amount of tax as computed by the taxpayer or corrected by IRS. Example: The original return shows the taxpayer computed the tax to be $1,300. Due to a math error, the tax was corrected to $1,800. The estimated tax penalty would be computed on the lesser amount of tax, $1,300.

  6. Revenue Agents, Revenue Officers, and Tax Examiners with access to IDRS may use command codes:

    1. COMPAE/COMPAS to facilitate the computation of the estimated tax penalty.

    2. PINEX (PIEST) to explain a computer generated estimated tax penalty computation to the taxpayer.

    3. Specific instructions regarding the input of both the COMPA and PINEX command codes are contained in the AIMS Handbook (IRM 2.8), IDRS Terminal Inquiries and, IDRS Terminal Input.

20.1.3.2.7.1  (09-12-2006)
Form 2210 or 2210-F

  1. Taxpayers use Forms 2210, Underpayment of Estimated Tax by Individuals Estate, and Trusts, and 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, to:

    1. Determine if they are liable for an estimated tax penalty on Form 1040 or Form 1041 returns (except private foundations and charitable trusts), and compute the penalty, if they wish to " self-assess," or allow IRS to compute the penalty;

    2. Use the annualized income installment method;

    3. Claim an exception to or waiver of the penalty;

    4. Treat income tax withheld from wages as paid when actually withheld, rather than in four equal amounts

  2. Service employees use Forms 2210 and 2210-F as worksheets when manually computing the penalty.

  3. Revenue Procedure 83–79, 1983–2 C.B. 597, allows taxpayer's to use either the tax table or the tax rate schedule, whichever is more advantageous, when using exceptions 2, 3, and 4 on Form 2210 or exception 2 on Form 2210-F.

  4. To determine if an estimated tax penalty is applicable where one or more of the required installments are based on the prior year's tax and the taxpayer filed or is filing a joint return for either the prior year or current year, but not for both years, one should do the following:

    1. If the taxpayer filed the prior year return as married filing separately, combine the two tax amounts. Ask the question, for the current year, did the taxpayer make estimated tax payments equaling at least 100 percent (or the applicable percentage if income is over $150,000) of the combined prior year tax liability? If no, compute the penalty.

    2. If the taxpayer filed a joint prior year return, separate the liabilities appropriate to each spouse. Compute the tax both spouses would each have paid had they filed separate returns for the prior year using the same filing status as they are using for the current year. Ask the question, for the current year, did the taxpayer make estimated tax payments equaling at least 100 percent of the separated prior year tax liability. If no, compute the penalty.

20.1.3.2.7.2  (09-12-2006)
Substitute For Return

  1. Estimated tax penalties in the Substitute for Return program (SFR) are assessed as if no return was filed. Usual processing of SFRs includes issuance of a statutory notice of deficiency after the return due date (including extensions). If no response is received to the statutory notice of deficiency, the assessment is made, including estimated tax penalty as appropriate.

  2. Many taxpayers file amended returns after the SFR is processed. The Service is under no legal or regulatory obligation to abate previously assessed taxes or penalties where documentation was not timely submitted and the taxpayer received legal notification from the Service. The taxpayer's only legal recourse in these situations is to pay the tax and file a claim under IRC section 6404.

  3. However, we also must consider the impact of erroneous assessments on our relationship with our customers and the mission of the Service, which is to collect the proper amount of tax at the least cost. Therefore, the Service may recompute the estimated tax penalty when the taxpayer files a subsequent return that increases or decreases the tax, even if filing occurs after the due date of the return (including extensions). In the SFR situation, the taxpayer's signed return is considered the original return.

  4. Estimated tax penalty adjustments to SFR modules (i.e. TC 150 of 00 $'s, with tax assessed by a TC 290/300) must be manually computed and assessed.

20.1.3.2.7.3  (09-12-2006)
Schedule H & Estimated Tax Penalty

  1. IRC section 3510 was enacted by the Social Security Domestic Employment Reform Act of 1994, P.L. 103–387, to simplify the payment of employment taxes for individuals who employ domestic workers. Under section 3510, an individual who employs only domestic workers may report employment taxes on Form 1040, Schedule H, and pay the employment taxes in a lump sum in connection with that filing. Individuals who pay domestic service employment taxes using the Schedule H, may be subject to additions to tax under IRC section 6654 for failure to pay estimated taxes. See IRC section 3510(b)(1).

  2. IRC section 3510(b)(2) provides that generally, individuals will not be subject to an estimated tax penalty if the individual was not subject to federal income tax withholding (i.e., from wages, pensions, annuities, etc.) and the tax owed would not exceed $1,000 but for the household employment taxes.

20.1.3.3  (09-12-2006)
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.

    • TC 171—Manual abatement of an ES penalty.

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

20.1.3.4  (09-12-2006)
Adjustments after Penalty Assessment

  1. This section will discuss the procedures and criteria for abatement or waiver of estimated tax penalties.

20.1.3.4.1  (09-12-2006)
Evaluating Claims for Abatement or Waiver of Estimated Tax Penalties

  1. For periods after December 31, 1983, specific waiver provisions of the estimated tax penalty were adopted under IRC section 6654(e).

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

  3. If the taxpayer establishes the waiver criteria, take the necessary action to suppress or adjust the penalty as appropriate.

  4. 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 and entered into the Master File.

20.1.3.4.1.1  (09-12-2006)
Procedures for Claiming an Abatement or Waiver of the Estimated Tax Penalty

  1. Taxpayers may claim abatement or waiver of the estimated tax penalty on their tax return or on Form 2210 or 2210-F. They may also send a letter or other correspondence requesting abatement or waiver of the estimated tax penalty. The request could also be made by personal (face to face) contact.

  2. To claim a waiver, based on a change to the tax law, the affected taxpayers should:

    1. Compute the penalty (by completing Form 2210 or 2210-F) on the basis of the law in effect before the changes were made, and on the basis of the law in effect after the changes were made. The penalty amount eligible for the waiver is the difference between the two computations.

    2. If preparing Form 2210 or 2210-F, follow the instructions for completing the form.

    3. The taxpayer should attach an explanation showing their computation, the amount of penalty to be waived, and what caused the tax increase and related underpayment of estimated tax.

20.1.3.4.1.2  (09-12-2006)
Waiver Criteria Under IRC Section 6654(e)(3)(A)

  1. For tax years beginning after December 31, 1983, IRC Section 6654(e)(3)(A) provides that the estimated tax penalty may be waived if the failure to make the estimated tax payment is due to casualty, disaster or other unusual circumstances such that the imposition of the penalty would be against equity and good conscience. This is not equivalent to reasonable cause.

  2. For example, reliance on the advice of a competent tax advisor may constitute reasonable cause that would warrant relief from other penalties, but it does not provide a basis for a waiver of the estimated tax penalty under IRC section 6654(e)(3)(A).

  3. In order for the waiver to be available, the failure to make the payment must be caused by:

    • Casualty

    • Disaster, or

    • Other unusual circumstances, and

    • Imposition of the penalty would be against equity and good
      conscience.

  4. Examples of situations where the waiver may be granted if it is determined that imposition of the penalty would be against equity and good conscience:

    1. The taxpayer's records are destroyed by fire or flood or other natural disaster. In many instances of natural disaster, area wide guidance on conditions for waivers will be issued.

    2. The taxpayer becomes seriously ill or is seriously injured and is unable to manage his affairs.

    3. The taxpayer designates that an overpayment of tax shown on a prior return is to be credited against estimated tax, but the overpayment is offset for either past-due child support or nontax federal debt under IRC section 6402(c), and the taxpayer is not notified of the offset before the due date of the estimated tax installment.

  5. Examples of situations where the waiver may not be granted:

    1. Reliance on the advice of a competent tax advisor.

    2. Retroactive application of a statute or regulation unless the statute or regulation specifically grants a waiver of the estimated tax penalty or the Service announces in the Internal Revenue Bulletin that such a waiver has been granted.

    3. Erroneous advice from the IRS unless such advice falls within the provisions of IRC section 6404(f), Abatement of Any Penalty or Addition to Tax Attributable to Erroneous Written Advice by the Internal Revenue Service, of the Internal Revenue Code or IRC section 301.6404–3 of the regulations.

  6. Requests for a waiver of the estimated tax penalty under IRC section 6654(e)(3)(A) must be submitted in writing and signed by the taxpayer. Waivers may not be granted based on an oral request from the taxpayer. Waiver of the penalty must be specifically approved by a manager or managerial official.

20.1.3.4.1.3  (09-12-2006)
Waiver Criteria under IRC Section 6654(e)(3)(B)

  1. Taxpayers may be eligible for a " waiver" of the penalty under IRC section 6654(e)(3)(B) if during the tax year they:

    1. Retire after having attained age 62, or

    2. Become disabled in the taxable year estimated payments are due, or during the preceding taxable year, and

    3. The underpayment is due to reasonable cause and not willful neglect.

    4. Reasonable Cause, as it applies to the estimated tax penalty for an individual, is considered only when the individual meets the conditions in (a) or (b) and (c) above, and then only to determine if the taxpayer is eligible for a statutory waiver of the penalty. See IRM 20.1.1.3, Relief from Penalties.

  2. When the individual qualifies for this statutory waiver, the estimated tax penalty should be abated using penalty reason code "044" to identify the abatement. If the individual does not meet the waiver conditions in (a) or (b) and (d) above, send an 854C letter using paragraph "V" informing the individual of the reason for denial and explaining his/her appeal rights. Input TC 290 for zero with blocking series 98/99 and Reason Code 065.

20.1.3.4.1.4  (09-12-2006)
Bankruptcy: IRC Section 6658

  1. IRC section 6658 prohibits the assertion of the estimated tax penalty on liabilities during the time the case is pending a Title 11 bankruptcy proceeding filed on or after October 1, 1979, if:

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

    2. The tax was incurred by the debtor before the order of relief or the appointment of a trustee in an involuntary case, whichever is earlier, and

    3. The bankruptcy petition is filed before the due date of the return including extensions, or

    4. The date for making the addition to the tax occurs on or after the day on which the petition was filed.

20.1.3.4.1.5  (09-12-2006)
Request for Abatement Due to an Erroneous Refund of Estimated Tax Payment, Offset, or Overpayment (Credit Elect)

  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.

    1. Abate the penalty if the taxpayer promptly returns the refund check or repays the refund amount within 10 days of its issue. Consider each case individually to determine if the refund was returned or repaid promptly.

    2. If the overpayment (credit elect) was offset by IRS for either past-due child support nontax amounts owed to other federal government agencies and the taxpayer was not notified prior to the estimated tax payment due date, abate the penalty if the taxpayer promptly repaid the amount offset.

    3. Example: A taxpayer has an extension to October 15th to file the return. The return has an overpayment that the taxpayer elects as a credit to the next year's return. If this overpayment is offset and the taxpayer does not receive a notice until December, the repayment may be considered prompt even if not received until December or early January of the following year. This repayment should still be considered as the taxpayer's first quarterly installment for penalty consideration.

20.1.3.4.1.6  (09-12-2006)
Individual Retirement Accounts (IRA) Rollovers to Roth IRAs

  1. A taxpayer with adjusted gross income (AGI) of $100,000 or less may convert a regular IRA into a Roth IRA at any time. If a taxpayer converts a traditional IRA to a Roth IRA and elects to have the amount included in income ratably over a four-year period, and receives an estimated tax penalty during one of the four-year elections:

    1. Do not remove the penalty.

    2. Explain that it is the taxpayer's responsibility to increase their withholding to cover the additional tax.