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My understanding is that if you pay at least 90% of your current tax year obligations, pre-deductions, or 100%† of your obligations in the previous tax year, you avoid the penalty.

I was just sent a notice (7 months late!) that I was assessed this fee on my 2022 taxes. However, my withholdings exceeded my estimated taxes (before credits and deductions), so I am struggling to figure out why the IRS thinks I owe a penalty. If I have the numbers correct, the calculation should be form 1040 line 16 (Tax under Taxes and Credits) vs either line 25a, 25d, or 33 (Payments Form W-2, ``, or Total Payments) (in my case, I only have W-2 tax payments, so they are all the same).

By those numbers, I overpaid, not underpaid.

If my understanding is not correct, what are the correct values to use for the calculation?

Clarifications from the comments:

  • I received a refund in April 2023
  • I didn't file an extension
  • According to the IRS website, the fee was assessed on April 15 2023 for 2022 tax year. Also irritating that they are charging me 7 months of interest penalties for not paying the fee that they chose not to inform me I had to pay at the time they imposed it either.
  • According to my tax prep software (TurboTax) I did not owe any penalty.

† yes, I know there are special cases where that value is different, but I don't trigger those since I overpaid this year anyway.

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  • In your question you mention estimated taxes. Did you file a return in April or an extension?
    – mhoran_psprep
    Commented Nov 16, 2023 at 3:32
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    Did you get a refund?
    – D Stanley
    Commented Nov 16, 2023 at 6:05
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    This sounds strange. April 15th is the due date, so the fee would be assessed on it, but if you actually received the refund it seems like a glitch. You might want to call the IRS phone number at 800-829-1040.
    – littleadv
    Commented Nov 16, 2023 at 9:33
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    A little update: after an hour long phone call with the IRS, they are also confused as to why this penalty was imposed. Apparently the agent needs to bring in the big guns to figure it out, so I will be hearing back from them some time in the next few weeks.
    – asgallant
    Commented Nov 17, 2023 at 19:42
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    @keshlam if it was a scam, it was brilliantly executed with the assistance of actual IRS agents, as the penalty in question does appear on my official tax transcripts, and the definitely real IRS knows about it...even if they do not know why it is there. The first thing I did was confirm that it was not a scam.
    – asgallant
    Commented Dec 21, 2023 at 2:06

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Websearch for "estimated tax underpayment penalty calculation" had https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty as it's first hit. Note the reference to due date; if you are late on a quarterly ET payment the penalty calculation may start from then even if you make up the difference later. (In other words. a last-minute "oops" payment in December may still leave you owing a penalty for earlier quarters.)

See elsewhere on that site for the formula for how much you should have paid and the dates on which it was due, if you need that too.

How We Calculate the Penalty

We calculate the amount of the Underpayment of Estimated Tax by Individuals Penalty based on the tax shown on your original return or on a more recent return that you filed on or before the due date. The tax shown on the return is your total tax minus your total refundable credits.

We calculate the penalty based on:

  • The amount of the underpayment
  • The period when the underpayment was due and underpaid
  • The interest rate for underpayments that we publish quarterly

Interest on a Penalty

We charge interest on penalties.

The date from which we begin to charge interest varies by the type of penalty. Interest increases the amount you owe until you pay your balance in full. For more information about the interest we charge on penalties, see interest

`

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  • Yes, I saw that page, but it doesn't actually say what the numbers to use are. What I want to know is how to determine whether I actually did underpay. I don't make quarterly tax payments; everything comes out of paycheck withholdings, and they are evenly distributed through each paycheck. I just found form 1040-ES, which has a worksheet for figuring out estimated tax payments, and a) it's all based on expected income and taxes, and b) it includes tax credits and deductions. By that worksheet, not only did I overpay, but I significantly overpaid.
    – asgallant
    Commented Nov 16, 2023 at 15:58
  • So send the IRS that worksheet and ask them to check and explain their decision. Note that it isn't just a matter of paying the total; you're expected to pay at least a quarter of that total each three months. (My solution, if/when I have significant taxable income again, is probably going to be just paying it all in the first quarter. That avoids penalties; paying it all in the last quarter may not.)
    – keshlam
    Commented Dec 18, 2023 at 1:24
  • I don't have to make estimated payments at all; all of my taxes are handled with paycheck withholdings, and those are more than sufficient to cover my annual taxes. Even the IRS agent I spoke to acknowledged that. It's a complete mystery as to how the penalty got assessed; which is quite a problem, because the IRS apparently cannot fill out the paperwork to remove the penalty without filling in the "why the penalty was deserved in the first place" field. So I have to wait for a senior agent to figure out what is going on and get the penalty removed.
    – asgallant
    Commented Dec 21, 2023 at 2:11

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