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My wife and I are first-time home-buyers. We misunderstood the concept of mortgage interest deductions and didn't set aside enough taxes throughout the year. When taxes were due, we paid the original tax amount in full (on time) but didn't pay the extra underpayment penalty on the grounds that it was an honest mistake. We filed a form 2210 and it looks like that was turned down. Is there anything else we can do at this point?

I can understand the point of the penalty if we didn't pay the entire yearly taxes on-time... but we did.

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    Paying on April 15th is not on time. Taxes are due when the income is earned. The tax forms are due to be filed on April 15. – littleadv Jun 9 '12 at 20:52
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When you say "set aside," you mean you saved to pay the tax due in April? That's underpaying. It's a rare exception the IRS makes for this penalty, hopefully it wasn't too large, and you now know how much to withhold through payroll deductions.

Problem is, this wasn't unusual, it was an oversight. You have no legitimate grounds to dispute. Sorry.

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If you file the long-form Form 2210 in which you have to figure out exactly how much you should have had withheld (or paid via quarterly payments of estimated tax), you might be able to reduce the underpayment penalty somewhat, or possibly eliminate it entirely. This often happens because some of your income comes late in the year (e.g. dividend and capital gain distributions from stock mutual funds) and possibly because some of your itemized deductions come early (e.g. real estate tax bills due April 1, charitable deductions early in the year because of New Year resolutions to be more philanthropic) etc. It takes a fair amount of effort to gather up the information you need for this (money management programs help), and it is easy to make mistakes while filling out the form. I strongly recommend use of a "deluxe" or "premier" version of a tax program - basic versions might not include Form 2210 or have only the short version of it. I also seem to remember something to the effect that the long form 2210 must be filed with the tax return and cannot be filed as part of an amended return, and if so, the above advice would be applicable to future years only. But you might be able to fill out the form and appeal to the IRS that you owe a reduced penalty, or don't owe a penalty at all, and that your only mistake was not filing the long form 2210 with your tax return and so please can you be forgiven this once?

In any case, I strongly recommend paying the underpayment penalty ASAP because it is increasing day by day due to interest being charged. If the IRS agrees to your eloquent appeal, they will refund the overpayment.

  • Perhaps I'm not fully understanding OPs situation, but I thought "Safe Harbor" might apply if OP paid at least as much as was due in the previous year (or not, in which case safe harbor wouldn't apply). – Kevin Fegan Nov 14 '16 at 8:42
  • @KevinFegan If you read the OPs question, you will see that the OP says that they did file Form 2210, and Form 2210 does takes into account the Safe Harbor provisions and gives the result that no underpayment penalty is required if the Safe Harbor provisions are met. The OP filled out Form 2210 (presumably the short version) which showed that a underpayment was due (so Safe Harbor was not met), but they did not pay the penalty. The only possible out is if the Annualized Method (long form) shows no penalty due and the OP appeals to the IRS to waive the penalty this time. – Dilip Sarwate Nov 14 '16 at 14:35
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didn't pay the extra underpayment penalty on the grounds that it was an honest mistake.

You seem to think a penalty applies only when the IRS thinks you were trying to cheat the system.

That's not the case. A mistake (honest or otherwise) still can imply a penalty.

While you can appeal just about anything, on any grounds you like, it's unlikely you will prevail.

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The underpayment "penalty" is just interest on the late payments--willful or not has nothing to do with it. When they feel it's willful there will be additional penalties.

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