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I am doing my 2021 return and realized 2 things:

  1. I underpaid my 2021 taxes via withholding, so much so that I may need to pay a penalty

  2. There is a mistake on my 2020 taxes (this re-affirms my decision to do my own taxes this year!), that, once corrected, means I overpaid my 2020 taxes.

I see on the 1040X form that there is the option to apply the overpayment to the estimated taxes for the year of my choice (1040X, Line 23). In order to reduce or eliminate my 2021 penalty, I am thinking of doing the following:

  1. Amending my 2020 taxes ASAP, and applying the overpayment to my 2021 estimated taxes.

  2. Referencing this estimated payment on my 2021 return (1040, line 26), and on line 11 of form 2210 (if applicable), making the date April 15, 2021 as per instructions.

My concern with this plan is timing. I know that that amended returns take a looonnnng time to process, and am concerned that if my 2021 return is processed before my 2020 amendment, the IRS will be like "what estimated payment??" and send me a nasty letter. That said, if I don't do this plan, I will owe a greater penalty and/or have to amend my 2021 taxes as well as my 2020 taxes.

I am also considering filing the amendment now, computing my 2021 taxes shortly thereafter but filing an extension (with appropriate payment) and waiting until the amendment is processed to file for 2021. I am not confident, however, that the amended return will be processed before the extension date of October 15th.

Any advice? Specifically, what happens if the IRS processes a return claiming I've paid estimated taxes that they aren't (yet) aware of?

2 Answers 2

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1040X (Amended return) can now be efiled, which can help reduce the time it takes for it to be processed. So yes, I'd suggest to amend 2020 ASAP, file an extension with payment, and file the 2021 return in October.

Specifically, what happens if the IRS processes a return claiming I've paid estimated taxes that they aren't (yet) aware of?

They'll send you a nasty letter, to which you'll respond "Look at the 2020 amended return filed on date XYZ".

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  • Thanks! While I don't think I can e-file the amend (I'm using FreeFileFillableForms), I'm glad to hear that the plan makes sense overall, and the stakes of a potential nasty letter are low. Thanks again :)
    – user115619
    Commented Feb 12, 2022 at 16:49
  • e-filing isn't filing. It's data interchange in lieu of filing, which the IRS is agreeing to if they like your numbers. It has no legal strength unless IRS is simpatico with the numbers. Generally if you are filing a 1040X (and IRS hasn't changed your form for you), that means something's going on that IRS doesn't know about. I'd stick with paper. Paper is legally binding, paper works. Commented Feb 13, 2022 at 19:22
  • @Harper-ReinstateMonica not sure I understand this argument. The IRS doesn't have to accept 1040X no matter the method of filing.
    – littleadv
    Commented Feb 13, 2022 at 19:50
  • @littleadv Your word "accept" is confusing. "Accept your paperwork" and "agree with the numbers on it" are two VERY different things! If you paper-file documents, that's it. It's added to the tax record for that year, and will legally bind both you and IRS. IRS quibbles with the numbers in their usual way, but they can't say "we disagree with your numbers, therefore you didn't file". (unless it's obviously not-even-wrong, and you get your day in court on that). With paper file, you did file, and can defend it. With e-"file", you didn't file, and can't defend it. Commented Feb 13, 2022 at 20:58
  • And in all fairness to IRS, I see the security benefits to refusing an e-"file" when the numbers disagree. A taxpayer who doesn't know their own figures is a red-flag for fraud. Fraud can happen with paper filing too, but IRS is more experienced with the risks there. Commented Feb 13, 2022 at 21:28
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Absolutely. I love that maneuver and have used it myself.

When you file 1040X and elect to have the refund applied to 2021 tax payments, that means it happened. It means it always happened that way, but IRS was unaware of it prior to the 1040X being filed. So it will count as timely payment toward your 2021 taxes, reducing or eliminating your late payment penalty.

This works because IRS thinks in an accrual mentality, not a cash mentality like most of us. It swings both ways, though: for instance, Congress had to push IRS to actually send 2020 stimulus checks; in their view, "sending a person a $1000 check in early 2020" was equivalent to "they claim credit on 2020 taxes and collect refund in April 2021". That wasn't cruelty; that was accrual thinking.

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