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In working through DW and my taxes I realized we owe about $1600 for 06. Our total withheld was less than 90% of what is owed. Due to some forgotten changes to one of the W-4s early in the year we ended up with less withheld than we owed last year. So based on my reading of Pub 505 and form 2210 it looks like we dont make any of th esafe harbour provisions.
I started to work through 2210 just to get an idea of what type of penalty we would be facing come April, but it got to complicated for me. What I am trying to get is just a rough, worst-case amount.
So, taking the $600 over the entire year at 8% simple interest I get a penalty of $48. Does that make sense as a worst-case penalty amount?

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In working through DW and my taxes I realized we owe about $1600 for 06. Our total withheld was less than 90% of what is owed. Due to some forgotten changes to one of the W-4s early in the year we ended up with less withheld than we owed last year. So based on my reading of Pub 505 and form 2210 it looks like we dont make any of th esafe harbour provisions.
I started to work through 2210 just to get an idea of what type of penalty we would be facing come April, but it got to complicated for me. What I am trying to get is just a rough, worst-case amount.
So, taking the $600 over the entire year at 8% simple interest I get a penalty of $48. Does that make sense as a worst-case penalty amount?


No. If you don't meet the safe harbor, the full $1600 will be subject to penalty. That would make your worst case scenario a penalty of $128.

Ira


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No. The penalty isnt a straight 8% of the amount of tax due with the return, nor 8% of the underpayment, but the info given isn't enough to answer correctly on what their penalty will be based. You should use what is called the "Short Method" and is on page 2 of form 2210. If you figured your tax just ignore page 1 of 2210 and go to page 2. It's pretty simple. Just subtract how much Withholding or equal payments you made from last year's tax, or from 90% of this year's tax and multiply by the factors they give, which change every year.

1. The penalty is based on the DIFFERENCE between how much was withheld and the lesser of last year's tax or 90% of this year's tax. Once the $1,000 THRESHHOLD is passed forget it, your penalty is figured on the full difference.

2. If you paid 4 equal and on time installments, or just paid withholding alone, multiply the difference in #1 times .05258 minus .00022 times the number of days prior to April 15, 2007 that you paid the difference.

3. So if the difference is actually $600 and you pay it by February 15 the penalty is $600 X (.05258-.00022 X 59)= $600 X .05258-.01298) = $600 X .0396 = $23.76. And if the difference is $1,600, the penalty is $1600 X .0396 or $63.36. I doubt if the difference is either $600 or $1,600, but the penalty is only 1/2 of what you think it will be.

ed

















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Since underwithholding penalty is daily interest, paying the amount due stops the penalty from increasing.

You referred to W-4s. It sounds like you did not make estimated payments. Witholding is assumed to be paid evenly across the quarters, regardless of how it was actually paid. If you had made estimated payments and your income was uneven during the year, it probably would be worth your time to work through the 2210. Given your situation, you can let the IRS calculate the penalty. The IRS will send a letter for the amount due.

Debra
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Thanks a lot Ed,

1. The penalty is based on the DIFFERENCE between how much was withheld and the lesser of last year's tax or 90% of this year's tax. Once the $1,000 THRESHHOLD is passed forget it, your penalty is figured on the full difference.

2. If you paid 4 equal and on time installments, or just paid withholding alone, multiply the difference in #1 times .05258 minus .00022 times the number of days prior to April 15, 2007 that you paid the difference.


Let me make sure I get this right-
If the difference between my withholding and last years taxes is about $240, than the penalty is $12.60, and than 5 cents less for each day I would pay it before 4/15/07.
So if I pay my taxes owed by 4/15/07 the full penalty would be $12.60, which the IRS will send me a bill for later. If I choose to pay my taxes before the deadline I can save 5 cents per day. Is that correct?
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Mosquito, that is correct as long as your AGI in 2005 was less than $150,000.

ed
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