Underpayment penalty for California

[David94]

Hello,

I filed 2022 California Form 540 NR tax return with a tax due of $5,000 before due date.

This is a first-year return for both Federal and CA state in US.

My client recently received a Notice from CA state. According to the notice, an underpayment penalty of $600 has been imposed on my client.

As this is my client’s first-year return, 2021 tax return was not required to be filed. Based on my understanding, the underpayment penalty should not be applicable to my client’s situation.

I would like to know that my understanding is incorrect.

Thank you for your help in advance.

[George4Tacks]

When all else fails, read the instructions https://www.ftb.ca.gov/forms/2022/2022-5805-instructions.html

From the 5805 

IMPORTANT: In most cases, the Franchise Tax Board (FTB) can figure the penalty for you and you do not have to complete this form.
See General Information B.
If you meet any of the following conditions, you do not owe a penalty for underpayment of estimated tax. Do not complete or file this form if:
• The amount of your tax liability (not including tax on lump-sum distributions and accumulation distribution of trusts) less credits (including the withholding credit) but not including estimated tax payments for either 2021 or 2022 was less than $500 (or less than $250 if married/RDP filing a separate return).
• Your 2021 return was for a full 12 months (or would have been if you were required to file) and you did not have any tax liability on that return.
• The amount of your withholding plus your estimated tax payments, if paid in the required installments, is at least 90% of the tax shown on your 2022 return or 100% of the tax shown on your 2021 return (110% if California adjusted gross income (AGI) was more than $150,000 or $75,000 if married/RDP filing a separate return) and you are not using the annualized income installment method. Taxpayers
with California AGI equal to or greater than $1,000,000 (or $500,000 if married/RDP filing a separate return) must use the tax shown on their 2022 tax return if they do not meet one of the two conditions above

You could call the Practitioner Hotline and argue that bullet #1 applies, since there was no tax due for the prior year. 

[David94]

Thank you for your reply.

When amending a tax return for other issues, I plan to include this issue as well into a amended tax return.

Merry Christmas & Happy New Year !!

[BobKamman]

That seems like a high amount for estimated-tax penalty.  Are you sure it's not something like failure to file, because they couldn't find the extension or you thought it wasn't needed because of disaster relief?  

[George4Tacks]

Also look at annualized income for California. That could at least reduce the penalty. I would get clarification about the penalty before filing an amended return. 

[joshuabarksatlcs]

also look into whether RTC Section 19132.5 applies.