How should Form 1040 be amended if error was introduced on lines 78 and 79?

Question

Background

Previously I asked "Where is payment for failure-to-file and failure-to-pay penalties included on Form 1040?" There I found out that the failure-to-file and failure-to-pay penalties should not be included on line 79.

I made the mistake of placing my failure-to-file and failure-to-pay penalties on line 79, so that the IRS decided to calculate penalties on the amount that already included the penalties. In other words, call my total tax owed X (i.e. what should have been on line 78) and the penalty for this Y (what should have been on the bottom margin). Then I already paid X + Y to the IRS, but the IRS calculated penalties on the amount X + Y rather than on just X, so it is requesting more money. In other words, once the error is resolved, the amount I should pay already matches the amount I did pay (so no net exchange of money is required).

Question

My question is, how should I inform the IRS of this? I spoke to an IRS representative on the phone, who said they had to honor my initial filing.

Form 1040X

I also tried filling in Form 1040X; details of this follow.

Intuitively,

• 1040X line 11 = amount I should have paid = X
• 1040X line 19 = amount I did pay = X + Y

But 1040X line 19 inherits (eventually) from 1040X line 16. The example given for line 16 (page 11) clarifies that penalties paid should not be included there:

Dillon is filing Form 1040X to amend his 2014 tax return. He sent a check for $1,500 with his original return, reflecting a payment of $1,400 in taxes and a $100 estimated tax penalty. When completing Form 1040X, Dillon enters $1,400 on line 16 (the check sent with the original return minus the $100 penalty).

So even though, intuitively, I should enter a higher amount on line 19, the instructions explicitly say I should just enter in the lower amount. This causes everything to go wrong, because lines 20-23 now all have to be 0.

Form 1040X also only covers two cases of comparing two numbers: when line 11 column C is more than or less than line 19. But in my case the two amounts are equal.

In other words, the final lines end up being all 0s, even though intuitively they shouldn't be.

Form 1040X also says under "Purpose of Form":

Change amounts previously adjusted by the IRS. However, do not include any interest or penalties on Form 1040X; they will be adjusted accordingly.

Answer 1

I'm mostly guessing based on existing documentation, and have no direct experience, so take this with a pinch of salt.

My best understanding is that you need to file Form 843. The instructions for the form say that it can be used to request:

A refund or abatement of a penalty or addition to tax due to reasonable cause or other reason (other than erroneous written advice provided by the IRS) allowed under the law.

The "reasonable cause" here is a good-faith confusion about what Line 79 of the form was referring to.

In Form 843, the IRC Section Code you should enter is 6654 (estimated tax). For more, see the IRC Section 6654 (note, however, that if you already received a CP14 notice from the IRS, you should cross-check that this section code is listed on the notice under the part that covers the estimated tax penalty).

If your request is accepted, the IRS should issue you Notice 746, item 17 Penalty Removed:

17. We removed the penalty we charged you and we are reviewing your account. We will let you know the results

You can get more general information about the tax collection process, and how to challenge it, from the pages linked from Understanding your CP14 Notice.