IRS Penalty for Overpaying Taxes?

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paul e
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IRS Penalty for Overpaying Taxes?

Post by paul e »

I filed my taxes with Turbo Tax for 2023, and paid quarterly my estimated taxes according to my return. Last week, I received a tax refund which I was not expecting, plus an IRS letter telling me I had over paid my estimated tax . What I couldnt fathom is why the statement they sent showing the over payment also included a Penalty for the over payment of my estimated taxes. Of course Ive heard of penalties for under payment, but over payment? Has anybody ever heard of this?
SlowMovingInvestor
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Re: IRS Penalty for Overpaying Taxes?

Post by SlowMovingInvestor »

Are you sure the penalty is for 'overpayment'?

You can get a refund of estimated taxes and still owe a penalty for underpayment if you didn't pay enough in (say) Q1 or Q2.
Cecelio
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Re: IRS Penalty for Overpaying Taxes?

Post by Cecelio »

OP, did you pay equal amounts, on time, for the 4 quarters? How much was the penalty?
billaster
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Re: IRS Penalty for Overpaying Taxes?

Post by billaster »

Penalties are based both on quantity and timeliness. You could overpay estimated taxes in Q4 and still owe a penalty if you underpaid taxes in Q1, Q2 or Q3.

If you were assessed a penalty, you may be able to fix this by filing a Form 2210 using the annualized income method if your income varied during the year.

For example, if you did a Roth conversion in Q4 that boosted your income and taxes, you can use Form 2210 to show the IRS that the additional income occurred only in Q4, not spread throughout the year.
gavinsiu
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Re: IRS Penalty for Overpaying Taxes?

Post by gavinsiu »

Check if you underpay your quarterly taxes. Let's say you noticed that you did not withhold taxes, and then overpaid the tax in Jan of next year to catch up, you may get hit with an underpayment penalty. You are supposed to make equal payment or pay in time.
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paul e
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Re: IRS Penalty for Overpaying Taxes?

Post by paul e »

Cecelio wrote: Sun May 12, 2024 12:02 pm OP, did you pay equal amounts, on time, for the 4 quarters? How much was the penalty?
Same amounts each quarter.. The refund was $416 for over payment, netted to $400 after they reduced it by the measly $16 penalty.
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samsoes
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Re: IRS Penalty for Overpaying Taxes?

Post by samsoes »

Were the quarterly payments enough to cover the safe harbor amount?
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inverter
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Re: IRS Penalty for Overpaying Taxes?

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Last edited by inverter on Sun May 12, 2024 6:05 pm, edited 1 time in total.
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samsoes
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Re: IRS Penalty for Overpaying Taxes?

Post by samsoes »

inverter wrote: Sun May 12, 2024 6:01 pm Why don't you hire a general contractor who would help fix the problems, or pay your own inspector?
You can hire general contractors and inspectors for Federal taxes?
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)
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Re: IRS Penalty for Overpaying Taxes?

Post by inverter »

samsoes wrote: Sun May 12, 2024 6:04 pm
inverter wrote: Sun May 12, 2024 6:01 pm Why don't you hire a general contractor who would help fix the problems, or pay your own inspector?
You can hire general contractors and inspectors for Federal taxes?
Weird - I had two threads open and it posted in a different one.
mtnlover
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Re: IRS Penalty for Overpaying Taxes?

Post by mtnlover »

Here is our recent experience, which might be helpful. A few weeks ago we received notification that the IRS was going to forgive $72 penalty for underpaying taxes in 2020. This was the first notification we had received that there was an issue. Enclosed was a statement/calculation indicating that we had actually OVERpaid our taxes that year by $39. (How generous of the IRS not to penalize us for overpaying!) A week or so later a check for $39 refunding our overpayment arrived. So nonsense is nonsense when it comes to the IRS. Can’t imagine how much more fun we’ll have when some slick salesperson sells them on the power and benefits of AI!
Cecelio
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Re: IRS Penalty for Overpaying Taxes?

Post by Cecelio »

paul e wrote: Sun May 12, 2024 5:56 pm
Cecelio wrote: Sun May 12, 2024 12:02 pm OP, did you pay equal amounts, on time, for the 4 quarters? How much was the penalty?
Same amounts each quarter.. The refund was $416 for over payment, netted to $400 after they reduced it by the measly $16 penalty.
I've been overpaying by thousands for the past few years. Ironically, because federal grants are late paying me. I just get the money back in April when I file my taxes. No overpayment fees.

Sounds like the IRS corrected your return. Look at your transcripts and compare that with what you submitted to find out what they changed. Maybe that will show something unusual.
MarkNYC
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Re: IRS Penalty for Overpaying Taxes?

Post by MarkNYC »

paul e wrote: Sun May 12, 2024 5:56 pm
Cecelio wrote: Sun May 12, 2024 12:02 pm OP, did you pay equal amounts, on time, for the 4 quarters? How much was the penalty?
Same amounts each quarter.. The refund was $416 for over payment, netted to $400 after they reduced it by the measly $16 penalty.
There is no such thing as an IRS penalty for overpayment of tax.

Since your 4 equal estimated tax payments resulted in a tax refund, the only logical reason for an estimated tax penalty is that the IRS is treating one or more of your estimated tax payments as having been paid late.
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Re: IRS Penalty for Overpaying Taxes?

Post by suemarkp »

paul e wrote: Sun May 12, 2024 5:56 pm
Cecelio wrote: Sun May 12, 2024 12:02 pm OP, did you pay equal amounts, on time, for the 4 quarters? How much was the penalty?
Same amounts each quarter.. The refund was $416 for over payment, netted to $400 after they reduced it by the measly $16 penalty.
Was your income roughly the same each quarter? Estimated payments need to be proportional to quarterly income. I dont think safe harbor helps, as there are penalties for under payment and penalties for not being timely. I was looking at a $4k refund with a $600 non timely penalty. I did the annualized income form and that $600 penalty went away because I paid things in the proper quarter. The IRS may not have the details to do that form, but for $16 i would not suffer through it.
Mark | Somewhere in WA State
MoreTaxes
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Re: IRS Penalty for Overpaying Taxes?

Post by MoreTaxes »

suemarkp wrote: Sun May 12, 2024 9:19 pm
paul e wrote: Sun May 12, 2024 5:56 pm
Cecelio wrote: Sun May 12, 2024 12:02 pm OP, did you pay equal amounts, on time, for the 4 quarters? How much was the penalty?
Same amounts each quarter.. The refund was $416 for over payment, netted to $400 after they reduced it by the measly $16 penalty.
Was your income roughly the same each quarter? Estimated payments need to be proportional to quarterly income.
This. The point is that the quarterly payments you make each quarter need to be commensurate with the income earned that quarter. So if you are earning the same throughout the year, the quarterly payments should be the same. Of course they quarterly payments should not be the same if your income is varying throughout the year.

If there is a quarter you underpaid, you could be subject to a penalty even if you overpaid over all for the year because the payments came in late. There is a tax form in which you can enter your income and tax payments by quarter to work all of that out.

And no, there is no such thing as a penalty for an over payment.
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FiveK
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Re: IRS Penalty for Overpaying Taxes?

Post by FiveK »

suemarkp wrote: Sun May 12, 2024 9:19 pmEstimated payments need to be proportional to quarterly income. I dont think safe harbor helps, as there are penalties for under payment and penalties for not being timely.
MoreTaxes wrote: Sun May 12, 2024 9:30 pmThe point is that the quarterly payments you make each quarter need to be commensurate with the income earned that quarter.
It depends....

See the Safe harbors wiki section, and look at lines 10 and 11 on Form 2210.

Constant estimated tax payments can be OK even if quarter-to-quarter income is highly variable.
billaster
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Re: IRS Penalty for Overpaying Taxes?

Post by billaster »

MarkNYC wrote: Sun May 12, 2024 9:14 pm Since your 4 equal estimated tax payments resulted in a tax refund, the only logical reason for an estimated tax penalty is that the IRS is treating one or more of your estimated tax payments as having been paid late.
Agree. In the absence of a Form 2210, the IRS is going to assume all of your income is evenly distributed. So if you paid four equal payments, which is more than sufficient, the most likely explanation is that one of them was determined to be late by a few days. This could be an error by either the IRS or you.

You might be able to fix this with a Form 2210 indicating your actual dates of payment but hardly worth it for $16.
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Re: IRS Penalty for Overpaying Taxes?

Post by bongo »

suemarkp wrote: Sun May 12, 2024 9:19 pm
paul e wrote: Sun May 12, 2024 5:56 pm
Cecelio wrote: Sun May 12, 2024 12:02 pm OP, did you pay equal amounts, on time, for the 4 quarters? How much was the penalty?
Same amounts each quarter.. The refund was $416 for over payment, netted to $400 after they reduced it by the measly $16 penalty.
Was your income roughly the same each quarter? Estimated payments need to be proportional to quarterly income. I dont think safe harbor helps, as there are penalties for under payment and penalties for not being timely. I was looking at a $4k refund with a $600 non timely penalty. I did the annualized income form and that $600 penalty went away because I paid things in the proper quarter. The IRS may not have the details to do that form, but for $16 i would not suffer through it.
This doesn't sound right. If the OP paid evenly each quarter and got a refund, there's no penalty (since they met the 90% rule).

Maybe one of the payments was made late, eg confusing the deadline as 7/15 instead of 6/15. That would add a bit of interest
almostretired1965
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Re: IRS Penalty for Overpaying Taxes?

Post by almostretired1965 »

So once you verify that you did in fact make all 4 payments on time, I think the most obvious explanation is that the IRS screwed up. Won't be the first time.
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Re: IRS Penalty for Overpaying Taxes?

Post by LotsaGray »

mtnlover wrote: Sun May 12, 2024 6:35 pm Here is our recent experience, which might be helpful. A few weeks ago we received notification that the IRS was going to forgive $72 penalty for underpaying taxes in 2020. This was the first notification we had received that there was an issue. Enclosed was a statement/calculation indicating that we had actually OVERpaid our taxes that year by $39. (How generous of the IRS not to penalize us for overpaying!) A week or so later a check for $39 refunding our overpayment arrived. So nonsense is nonsense when it comes to the IRS. Can’t imagine how much more fun we’ll have when some slick salesperson sells them on the power and benefits of AI!
I suspect IRS is already using some forms of AI even if it is just the old expert systems. Most likely use some form of AI to help select “best” returns to audit. Those types of AInhave been in use for decades.
cas
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Re: IRS Penalty for Overpaying Taxes?

Post by cas »

paul e wrote: Sun May 12, 2024 11:15 am I filed my taxes with Turbo Tax for 2023 [ . . .]
FiveK wrote: Sun May 12, 2024 9:41 pm See the Safe harbors wiki section, and look at lines 10 and 11 on Form 2210.
Along the lines of FiveK's advice...

If you have Turbotax *Desktop*, here's how to get it to show you the Form 2210 (and penalty worksheet) that it did in the background, even if it was not required to include it with the return. (I don't know if there is a way to get at it via the web version of Turbotax.)
  • Bring up your 2023 return in Turbotax.
  • Click on the "Forms" icon near the upper right.
  • Click on the "Open Forms" icon above the list of forms on the left
  • Enter "2210" in the "Type a Form Name" entry field.
  • Click on and look through the "Form 2210" and "Form 2210 Penalty Worksheet" items
Especially if you use the Safe Harbors wiki section as a guide, what does the Form 2210, as filled in by Turbotax, tell you about which safe harbors Turbotax thinks you did or did not meet?
single2019
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Re: IRS Penalty for Overpaying Taxes?

Post by single2019 »

almostretired1965 wrote: Sun May 12, 2024 10:11 pm So once you verify that you did in fact make all 4 payments on time, I think the most obvious explanation is that the IRS screwed up. Won't be the first time.
In my experience tax payers screw up far more times than the IRS
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Re: IRS Penalty for Overpaying Taxes?

Post by LotsaGray »

single2019 wrote: Mon May 13, 2024 7:53 pm
almostretired1965 wrote: Sun May 12, 2024 10:11 pm So once you verify that you did in fact make all 4 payments on time, I think the most obvious explanation is that the IRS screwed up. Won't be the first time.
In my experience tax payers screw up far more times than the IRS
Quite true. I also find IRS is far more reasonable than given credit so long as you work with them.
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Re: IRS Penalty for Overpaying Taxes?

Post by SnowBog »

bongo wrote: Sun May 12, 2024 9:44 pm
Maybe one of the payments was made late, eg confusing the deadline as 7/15 instead of 6/15. That would add a bit of interest
This was my thought too...

Districtly remember first time I was making "quarterly" estimated payments, which I naively assumed were "quarterly"... I had been paying proportional to my income (in addition to W2 withholding), and by year end had met safe harbor. I intentionally overpaid (for I Bonds), and was surprised to get an adjustment for a penalty. Turns out, "quarterly" means something different to the IRS - and making my payments every 3 months ended up with a payment being "late". Since then, I've paid close attention to the IRS "quarterly" dates and haven't had another penalty since.
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Re: IRS Penalty for Overpaying Taxes?

Post by suemarkp »

FiveK wrote: Sun May 12, 2024 9:41 pm
suemarkp wrote: Sun May 12, 2024 9:19 pmEstimated payments need to be proportional to quarterly income. I dont think safe harbor helps, as there are penalties for under payment and penalties for not being timely.
MoreTaxes wrote: Sun May 12, 2024 9:30 pmThe point is that the quarterly payments you make each quarter need to be commensurate with the income earned that quarter.
It depends....

See the Safe harbors wiki section, and look at lines 10 and 11 on Form 2210.

Constant estimated tax payments can be OK even if quarter-to-quarter income is highly variable.
So there are safe harbors for estimated payments, but they can still be tricky if your income is uneven year to year. For estimated payments, you need to meet the 90% by quarter for the previous year. If you had a big lump early last year, you need to make that big payment again even without a corresponding income lump. I did a Roth conversion in February in one year and in November another year. Safe Harbor doesn't work well for that.

I think the best approach is to pay completely by withholding, or if using estimated payments make the payment the month the income is realized and suffer with form 2210AI if you need to. Don't try to even it out or make it up in December unless you really know what you're doing.
Mark | Somewhere in WA State
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FiveK
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Re: IRS Penalty for Overpaying Taxes?

Post by FiveK »

suemarkp wrote: Tue May 14, 2024 1:11 pm
FiveK wrote: Sun May 12, 2024 9:41 pm See the Safe harbors wiki section, and look at lines 10 and 11 on Form 2210.

Constant estimated tax payments can be OK even if quarter-to-quarter income is highly variable.
So there are safe harbors for estimated payments, but they can still be tricky if your income is uneven year to year. For estimated payments, you need to meet the 90% by quarter for the previous year. If you had a big lump early last year, you need to make that big payment again even without a corresponding income lump.
Without going through Schedule AI, and doing only estimated tax payments, cumulative "quarterly" payments must be equal to or greater than 1/4, 1/2, 3/4, and all of the lower of
- 90% of this year's tax liability, or
- 100% (or 110%) of last year's tax liability.

The tax liabilities above are equal for each quarter. They don't depend on quarterly income, either last year's or this year's.

That changes if you use Schedule AI.
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