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There is a rule that if no taxes are owed on last year's tax return, the IRS will not impose a penalty, but will interest be charged?

Example: assume no federal taxes have been withheld during 2018. On April 15th 2019 tax return is filed and 20k of taxes is owed. No late payment penalty is assessed because no taxes were owed for 2017. Will there still be an interest charge on the 20k?

Do we have an authoritative reference on this?

Edit: I was not precise enough. I meant tax liability in 2017 as per IRS 2018 publication 505 (line 63 - line 58 - line 59 on 2017 form 1040) was zero, not taxes owed (line 78 - also zero)

  • "No tax owed" does not equal "No taxliability". Which of those were true regarding your 2017 taxes? – mhoran_psprep Oct 9 '18 at 2:58
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In this scenario, no estimated payments are required and the tax owed is paid in full with the on-time return. Therefore, no interest is due. According to the IRS, "Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment in full."

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    (And) form 2210 when it applies is called a penalty and not interest, even though mathematically it is equal to interest. – dave_thompson_085 Dec 11 '19 at 8:57
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Example: assume no federal taxes have been withheld during 2018. On April 15th 2019 tax return is filed and 20k of taxes is owed. No late payment penalty is assessed because no taxes were owed for 2017. Will there still be an interest charge on the 20k?

I believe there is a flaw in this logic. As described in the question, the fact that that no taxes were owed for 2017 is not relevant. In order for the rest of the question to be true the key metric is that there was no tax liability for 2017.

from IRS pub 505

Who Does Not Have To Pay Estimated Tax

If you receive salaries and wages, you may be able to avoid paying estimated tax by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4 with your employer. See chapter 1.

Estimated tax not required.

You don’t have to pay estimated tax for 2018 if you meet all three of the following conditions.

  • You had no tax liability for 2017.
  • You were a U.S. citizen or resident alien for the whole year.
  • Your 2017 tax year covered a 12-month period.

You had no tax liability for 2017 if your total tax (defined later under Total tax for 2017—line 12b ) was zero or you didn’t have to file an income tax return.

So if you had no tax liability in 2017, then you can avoid estimated payments.

If you have zero withheld in 2018, and owe 20K then expect to be hit with the underpayment penalty.

  • I edited my question to reflect that the quantity in question is tax liability in 2017 (which was indeed zero). There still seems to be an issue. Not having to make estimated payments does not seem to imply that no underpayment penalty will be assessed. If you look at Publication 505, chapter 4 (page 48), it talks about underpayment penalty for 2017 (but not 2018). Under Exceptions -> No Tax Liability Last Year, it provides the same conditions as cited by you above, but again, it's for the wrong year. – NingNing Oct 9 '18 at 16:12
  • The problem is the document was for taxes filed in April 2018, the one for April 2019 hasn't been published. – mhoran_psprep Oct 9 '18 at 17:18
  • @NingNing+ many IRS pubs, including this one, and also forms and instructions like 2210, are revised and republished every year, but the web version is only the most recent one -- see the title at the top of the webpage or the cover page for PDF/paper. Prior years (back to like 1990) are available from a link under the 'forms and instructions' tab. The change to 2018 p505 was overaggressive: total tax is 12b on 2018 1040 because it was reorganized, but (as you said) was 63 with tweaks on 2017 1040. – dave_thompson_085 Dec 11 '19 at 8:35
  • FWIW when 2018 form 2210 instructions were published, which according to my computer datestamp was March 2019, they do have the references to 2018 1040 correct. – dave_thompson_085 Dec 11 '19 at 8:49
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Do we have an authoritative reference on this?

IRS Publication 505 provides Estimated Tax info. The exact quote from page 3 is:

You should try to have your withholding match your actual tax liability. If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty.

See page 48 for examples about penalties and interest.

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    This doesn't address the question. Question: if I don't owe the penalty, do I owe interest? Your answer: you may owe interest and a penalty. But the question presumes that a penalty is not owed. The asker already knows that interest and penalties are possible but specifically asks about a suggestion when a penalty is not charged (because no tax was owed the previous year). You've answered a specific situation with a general answer that does not take into account the specific situation. – Brythan Oct 9 '18 at 1:14
  • Non professionals shouldn't be answering tax questions here, particularly those where additional penalty and/or interest may accrue due to inaction. If the OP can't figure out the answer from the relevant Publication (which I provided) and the examples provided within, he should consult an accountant. – Bob Baerker Oct 9 '18 at 17:39
  • Bob, your last comment does not make sense. The answer to my question cannot be unambiguously "figured out" from the publication you provided. One can only infer an answer to a question I have not asked. – NingNing Dec 18 '19 at 20:33
  • @NingNing - If you cannot "unambiguously" figure out the answer from the publication provided then I repeat what I offered in my previous comment: "Consult an accountant." – Bob Baerker Dec 18 '19 at 20:51
  • Bob Bearker, it cannot be done given the information in the reference. Therefore no accountant will be able to do it either. I am assuming you are an accountant, and you didn't even understand the question. Hence the downvotes and the negative comments you received. – NingNing Dec 18 '19 at 23:44

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