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Underpayment Penalty Calculation in disaster relief areas

Ron P
Level 3

As expected, the IRS is now sending out underpayment penalty notices (CP30) for 2023.  For the most part, I agree with their calculations for states entitled to disaster area tax relief.  However, when the IRS calculates their “principal” owed as of 11/16/2023, they subtract 75% of withholding – not withholding through 11/16/2023 which would be 87.67% (i.e., 320/365).  For example, if a taxpayer’s tax liability for the year was $240K and they had $200K withheld from wages and pensions, their required installment payment on 11/16/2023 would have been $180K.  The IRS then subtracts $150K (i.e., 75% of withholding) to arrive at principal owed of $30K.   In reality, the taxpayers withholding through 11/16/2023 was closer to $175K (i.e., 87.67% of $200K) which results in principal owed of $5K.  I believe the resulting 8% penalty calculation should be based on $5K, not $30K.  Per the CP30 notice, you can get a removal or reduction of penalty if you send in a completed 2210.  Personally, I would rather have the IRS correct their calculation than spend my time filling out 2210s.

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