SAFE HARBOR ON ESTIMATES

[dd4vols]

So, I somehow through word of mouth, landed a new client this year...and a very wealthy one at that.  the client's 2022 tax liability was $3.2mm, and they made, at the behest of their previous CPA, a $3.4mm 1040ES on December 27, 2023 ("before the end of year", seemed to be some kind of key words).

The previous CPA told the CEO/COO of their company (also a CPA, but who now does not practice in our wonderful arena), that the above scenario would result in no estimated tax penalties.  Well, I didn't just hang my shingle a few months ago, but I'll be danged if I have ever thought this was a 'viable solution'. ProSeries seems to agree with me, and calculated a substantial estimated tax penalty, even though they ended up being about $400k overpaid at the end of the return.

So, I guess I am asking my learned colleagues on here, if y'all give any legitimacy to the thought process of the previous CPA?  

[Norman2001]

This if from the IRS, and it seems vague because of the word "may".  I don't know what triggers the word "will". If your client earns money throughout the year, I would recommend to them that they make the four payments throughout the year rather than one at the end. 

When to pay estimated taxes

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

[IRonMaN]

All I can say is, not all CPAs are created equal.  There are a lot that could easily change their initials to CPI (certified public idiot).

[Terry53029]

He was probably thinking of the 100% taxes paid then no penalty, but that only applies if the taxes are withheld on time. From the instructions for 2210. 

 "Who Must Pay the Underpayment Penalty In general, you may owe the penalty for 2023 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of: 1. 90% of your 2023 tax, or 2. 100% of your 2022 tax. Your 2022 tax return must cover a 12-month".

[Jim-from-Ohio]

Instead of making estimated payments I sometimes advise my payroll clients to deduct a lot for federal on the last paycheck of the year.. treated as paid throughout the year!

[dd4vols]

yeah, we spend half of December calculating bonuses and withholdings on our corporation and S Corp clients.  What I failed to mention in my original post, is that the income source is an LLC partnership, so I don't have the luxury of that option.

[sjrcpa]

If the bulk of their income was earned in the 4th quarter of 2023 the prior CPA could have been correct. You can annualize income for the 2210 penalty computations.

[sjrcpa]

@Terry53029 At that level of income (& at a lot lower level) the safe harbor is 110% of prior year tax for federal.

[BobKamman]

Did you check for a 2210 on the 2022 return?  Did it annualize income?  (Should it have?)  When did the previous CPA tell him to make the single payment in December 2023?  Was it just that month, and it was meant to minimize the penalty, not eliminate it?

[dd4vols]

No 2210 filed for 2022.  And no annualizing income option.  And I believe he said, "would be safe, if made before December 31"

maybe this could be the reason he is a 'former CPA"