IRS Penalty For Failures To Pay Timely ROTH CONV. Est.Taxes
In 2009 I had no expectation that I would be eligible to do a TIRA to ROTH IRA conversion because approximate tax exempt interest, ordinary and qualified dividends and capital gain distributions equal to 2008 interest and distributions when added to expected 2009 taxable income including retirement income and social security would have exceeded the limit of MAGI eligibility for conversion. However, because of the swoon of the market and the subsequent small amount of taxable distributions on my taxable investments in 2009, by mid-December of 2009 after investment distributions were finalized, I discovered that my MAGI would indeed come in just under the eligibility limit. Therefore on December 23, 2009 I converted $56,514.13 from my TIRA’s to ROTH IRA’s and on January 9, 2010 sent the IRS a check for the total amount of estimated tax liability associated with that conversion ( that payment actually caused me to overpay my 2009 final tax liability by approximately $300 ).
On May 10,2010 I received a notice of an assessed tax penalty for failure to pay estimated tax on a timely basis and charging that penalty beginning on 4/15/09 thru 1/12/2010. That penalty was assessed against the overpayment amount that I had asked to have applied to my 2010 taxes. Since I did not expect to be eligible for ROTH conversions in 2009, I paid no estimated taxes for Qtrs.1-3 but since I paid the entire estimated tax on the December conversion prior to the Qtr. 4 deadline; I expected to be safe under the 90% rule. I did not meet the 2nd rule since 2009 taxes owed were 85% of 2008 taxes.
On May 10, 2010 I received Notice of Estimated Tax Penalty and on May 18, 2010 I sent an appeal for waiver of the entire penalty along with Page # 1 of IRS Form 2210 and extensive documentation including appropriate brokerage statements depicting dates and amounts of the subject conversions. On June 22, 2010 I received a letter from the IRS indicating ” we haven’t resolved this matter because we haven’t completed all the research necessary for a complete response” and promised a reply within 45 days. On August 9, 2010 I received another letter indicating an inability to “provide a complete response because of heavy workload” and again promised a response within 45 days.
Anyone know where I went wrong? Did I make “Mr. IRS MAN” mad because I challenged his measly assessment and he’s now auditing my entire return for 2009 plus past years? Are not IRS Auditors empowered to make decisions regarding an $134.01 appeal amount without it going on for months? I know, it’s insignificant, but it’s the PRINCIPLE!.
Thanks,
Herm
Permalink Submitted by Alan Spross on Sat, 2010-08-14 01:54
Herm,
The basic problem is that when you pay estimates, they are only credited as of the date you pay them. The IRS assumes you received all your income spread equally throughout the year and therefore are charging you the interest for the first 3 quarters. It sounds like you had no actual withholding, but if you did, the IRS would apply that equally over the entire year.
It sounds like you gave them info under which THEY could have completed the infamous annualized income installment method on Sch AI. But you must do that form yourself and I suspect that if you submitted the completed form to them it would reduce the penalty to a much smaller amount. It will take considerable time to complete the form, so I guess it depends on whether you want to go through with this exercise or not. It might save you $100, but if it takes 10 hours, that amounts to a saving of only $10 per hour.
Permalink Submitted by Herm Brames on Tue, 2010-08-17 14:58
Thanks for your response Alan. Interestingly, my monthly witholding for 2009, absent the ROTH Conversion tax obligation, would have exceeded my final 2009 tax obligation by $3,400. I can then probably assume that the entire penalty assessed me for not paying estimated taxes resulted from my conversion of TIRA’s to ROTH IRA’s on December 23, 2009.
Pardon the cynicism Alan but it seems that my problem was in not forseeing the paucity of dividend and capital gain distributions on my taxable investments in 2009 and my discovery on December 23, 2009 that I in fact met the eligibility requirements for the ROTH Conversion. Even though I had no intention of doing a ROTH Conversion in 2009, I nevertheless should have paid approximately $3,000 estimated taxes in each of April, June, and September and then if I made no conversions late in the year I could have applied for an IRS refund of the approximately $9,000 estimated tax paid. How absurd! Alternatively, as you suggest, I could spend the 10? hours to complete Sch. A1 to avoid the penalty. Don’t you love the IRS!
Herm
Permalink Submitted by Alan Spross on Tue, 2010-08-17 16:12
Your situation is probably very typical since many Roth conversions are done late in the year. And if you did not pay the estimates starting in April, there is nothing you can do at that point other than to complete the AI schedule. Paying the full tax bill when you did does help somewhat because it stops the interest clock as of 9/15 instead of 12/31. The only other thing that you could if you were in the position to do it would be to create a large withholding in December because withholding is deemed spread over all 4 quarters rather than just when paid. But the withholding should NOT come from the conversion or you will not have converted the amount you planned.
The AI should wipe out most of your penalty, and of course the 10 hours was just an arbitrary figure to reflect that for most people this form is a real bear.
Permalink Submitted by Herm Brames on Thu, 2010-09-09 21:35
Good News. There is at least one human being in the IRS. Had a call yesterday from IRS lady indicating that the penalty assessed me would be refunded in full without completing any additional forms. She cautioned that this was a one time event and that I should complete the appropriate required forms for a similiar situation in the future.
Permalink Submitted by Alan Spross on Thu, 2010-09-09 22:24
Thanks for the update. Appears that the IRS does not like reviewing an AI any more than taxpayers like completing one. Thus, the “one time event”.
Permalink Submitted by mk foss on Fri, 2010-09-10 03:05
The IRS will give folks who have just retired a one-time pass on estimated tax penalties. It looks like this was done here. I knew someone who tried to ask for it twice but was unsuccessful – one time only!
Permalink Submitted by Alan Spross on Fri, 2010-09-10 04:26
of Sec 2210:
>>>>>>>>>>>>>>
Waiver of Penalty Part I—Required Annual Payment
If you have an underpayment, all or part of the penalty for that Complete lines 1 through 9 to figure your required annual
underpayment will be waived if the IRS determines that:Here is the applicable portion
• In 2008 or 2009, you retired after reaching age 62 or became
disabled, and your underpayment was due to reasonable
cause
>>>>>>>>>>>>>
IRS refused waiver on this for my wife when she was downsized at start of the real estate crunch. They said a layoff is not deemed a retirement even when taxpayer over 62 never goes back to work or files for UC (!)
Had to do an AI to wipe out most of 90% of the penalty amount. It appeared to me that a layoff you don’t plan for that turns into retirement is better justification for the waiver than a retirement that can be planned.