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tax penalty

Q&A: Are IRS quarterly payments mandatory?

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Dear Liz: I live totally on my investment income. I receive the majority of my income at the end of the year, mostly dividends from my brokerage account.

A couple of years ago, when talking to an IRS agent about another matter, I asked when I should make my estimated tax payment. I was told that I had to make the payments quarterly. This year, when I was talking to my accountant, she told me that I could make a lump-sum payment at the end of the year without incurring a penalty. Who is correct, the IRS agent or my accountant?

Answer: Ours is a pay-as-you-go system, and the IRS assumes that your income is received evenly throughout the year, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Therefore, the agency typically expects four estimated tax payments of roughly equal size, with the payments due April 15, June 15, Sept. 15 and Jan. 15. If the payments aren’t made as expected, you can get hit with an underpayment penalty.

However, the IRS allows a taxpayer to show that their income is not earned equally throughout the year by filing a Form 2210 with a related Schedule AI (Annualized Income Installment Method), Luscombe says. Schedule AI allows you to show when income was earned during the year so you can match your estimated payment dates to when you actually received the money.

Schedule AI is more work, since it requires you to report adjusted gross income for each of the four quarters, as well as your itemized deductions and other tax details items, Luscombe notes. But if your income comes at the end of the year and the corresponding estimated tax payment was made on Jan. 15 of the following year, filing this paperwork may be sufficient to avoid a penalty for underpaying estimated taxes, he says.

Q&A: How to reduce the tax penalty from an IRA distribution goof

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Dear Liz: I have missed three years of required minimum distributions from one of my IRAs although I have not heard from the IRS about this. What do you advise me to do now?

Answer: Did you include this account when calculating your required minimum distribution each year? If so, you won’t owe a penalty. You’re supposed to calculate RMDs for each of your IRAs, but you don’t have to withdraw money from each account. Instead, you can take the year total from any of your IRA accounts.

If you forgot to include this account in your calculations, however, then you would typically owe a penalty.

In the past, people who failed to take their RMDs faced a 50% penalty on the amount they should have withdrawn but didn’t. Starting in 2023, the penalty has been reduced to 25%, or 10% if the oversight is corrected within two years of the RMD’s due date, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You can request a complete waiver of the penalty if you can show the failure was due to reasonable cause and that you are taking steps to correct the oversight, Luscombe said. You’ll need to file Form 5329 and attach a letter explaining why you failed to withdraw the proper amount.