Publication 505 (2012), Tax Withholding and Estimated Tax

4. Underpayment Penalty for 2011

Table of Contents

What's New

You should consider the items in this section when figuring any underpayment penalty for 2011.

Temporary decrease in employee's share of payroll Tax. Social security tax is withheld from an employee's wages at the rate of 4.2% (down from 6.2%) up to the social security wage limit of $106,800. There is no change to Medicare withholding.The same reduction applies to the net earnings from self-employment—the temporary rate will be 10.4% (down from 12.4%) up to the social security wage limit of $106,800.

Advance earned income credit. The advance earned income credit (EIC) was eliminated. If you are a household employer and made advance EIC payments, you do not include those payments as estimated tax payments.

Introduction

If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have underpaid your estimated tax and may have to pay a penalty.

You may understand this chapter better if you can refer to copies of your latest federal income tax returns.

No penalty. Generally, you will not have to pay a penalty for 2011 if any of the following apply.

The total of your withholding and timely estimated tax payments was at least as much as your 2010 tax. (See Special rules for certain individuals for higher income taxpayers and farmers and fishermen.)
The tax balance due on your 2011 return is no more than 10% of your total 2011 tax, and you paid all required estimated tax payments on time.
Your Total tax for 2011 (defined later) minus your withholding is less than $1,000.
You did not have a tax liability for 2010.
You did not have any withholding taxes and your current year tax (less any household employment taxes) is less than $1,000.

IRS can figure the penalty for you. If you think you owe the penalty, but you do not want to figure it yourself when you file your tax return, you may not have to. Generally, the IRS will figure the penalty for you and send you a bill.

You only need to figure your penalty in the following three situations.

You are requesting a waiver of part, but not all, of the penalty.
You are using the annualized income installment method to figure the penalty.
You are treating the federal income tax withheld from your income as paid on the dates actually withheld.

However, if these situations do not apply to you, and you think you can lower or eliminate your penalty, complete Form 2210 or Form 2210-F and attach it to your return. See Form 2210 , later.

Topics - This chapter discusses:

The general rule for the underpayment penalty,
Special rules for certain individuals,
Exceptions to the underpayment penalty,
How to figure your underpayment and the amount of your penalty on Form 2210, and
How to ask the IRS to waive the penalty.

Useful Items - You may want to see:

Form (and Instructions)

2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts
2210-F Underpayment of Estimated Tax by Farmers and Fishermen

See chapter 5 for information about getting these forms.

General Rule

In general, you may owe a penalty for 2011 if the total of your withholding and timely estimated tax payments did not equal at least the smaller of:

90% of your 2011 tax, or
100% of your 2010 tax. (Your 2010 tax return must cover a 12-month period.)

Your 2011 tax, for this purpose, is defined under Total tax for 2011 , later.

Special rules for certain individuals. There are special rules for farmers and fishermen and certain higher income taxpayers.

Farmers and fishermen. If at least two-thirds of your gross income for 2010 or 2011 is from farming or fishing, substitute 66²/₃% for 90% in (1) above.

See Farmers and Fishermen , later.

Higher income taxpayers. If your AGI for 2010 was more than $150,000 ($75,000 if your 2011 filing status is married filing a separate return), substitute 110% for 100% in (2) under General Rule . This rule does not apply to farmers or fishermen.

For 2010, AGI is the amount shown on Form 1040, line 37; Form 1040A, line 21; and Form 1040EZ, line 4.

Penalty figured separately for each period. Because the penalty is figured separately for each payment period, you may owe a penalty for an earlier payment period even if you later paid enough to make up the underpayment. This is true even if you are due a refund when you file your income tax return.

Example.

You did not make estimated tax payments for 2011 because you thought you had enough tax withheld from your wages. Early in January 2012, you made an estimate of your total 2011 tax. Then you realized that your withholding was $2,000 less than the amount needed to avoid a penalty for underpayment of estimated tax.

On January 10, you made an estimated tax payment of $3,000, which is the difference between your withholding and your estimate of your total tax. Your final return shows your total tax to be $50 less than your estimate, so you are due a refund.

You do not owe a penalty for your payment due January 15, 2012. However, you may owe a penalty through January 10, 2012, the day you made the $3,000 payment, for your underpayments for the earlier payment periods.

Minimum required each period. You will owe a penalty for any 2011 payment period for which your estimated tax payment plus your withholding for the period and overpayments for previous periods was less than the smaller of:

22.5% of your 2011 tax, or
25% of your 2010 tax. (Your 2010 tax return must cover a 12-month period.)

Minimum required for higher income taxpayers. If you are subject to the rule for higher income taxpayers, discussed above, substitute 27.5% for 25% in (2) under General Rule .

When penalty is charged. If you miss a payment or you paid less than the minimum required in a period, you may be charged an underpayment penalty from the date the amount was due to the date the payment is made. If a payment is mailed, the date of the U.S. postmark is considered the date of payment.

Estate or trust payments of estimated tax. If you have estimated taxes credited to you from an estate or trust (Schedule K-1 (Form 1041), box 13, code A), treat the payment as made by you on January 15, 2012.

Amended returns. If you file an amended return by the due date of your original return, use the tax shown on your amended return to figure your required estimated tax payments. If you file an amended return after the due date of the original return, use the tax shown on the original return.

However, if you and your spouse file a joint return after the due date to replace separate returns you originally filed by the due date, use the tax shown on the joint return to figure your required estimated tax payments. This rule applies only if both original separate returns were filed on time.

2010 separate returns and 2011 joint return. If you file a joint return with your spouse for 2011, but you filed separate returns for 2010, your 2010 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.

2010 joint return and 2011 separate returns. If you file a separate return for 2011, but you filed a joint return with your spouse for 2010, your 2010 tax is your share of the tax on the joint return. You are filing a separate return if you file as single, head of household, or married filing separately.

To figure your share of the taxes on a joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2010 using the same filing status as for 2011. Then multiply the tax on the joint return by the following fraction.

	The tax you would have paid had you filed a separate return
	The total tax you and your spouse would have paid had you filed separate returns

Example.

Lisa and Paul filed a joint return for 2010 showing taxable income of $49,000 and a tax of $6,516. Of the $49,000 taxable income, $41,000 was Lisa's and the rest was Paul's. For 2011, they file married filing separately. Lisa figures her share of the tax on the 2010 joint return as follows.

2010 tax on $41,000 based on a separate return	$ 6,438
2010 tax on $8,000 based on a separate return	803
Total	$ 7,241
Lisa's percentage of total tax ($6,438 ÷ $ 7,241)	88.91%
Lisa's part of tax on joint return ($6,516 × 88.91%)	$ 5,793

Form 2210. In most cases, you do not need to file Form 2210. The IRS will figure the penalty for you and send you a bill. If you want us to figure the penalty for you, leave the penalty line on your return blank. Do not file Form 2210.

To determine if you should file Form 2210, see Part II of Form 2210. If you decide to figure your penalty, complete Part I, Part II, and either Part III or Part IV of the form and the Penalty Worksheet in the Instructions for Form 2210. If you use Form 2210, you cannot file Form 1040EZ.

On Form 1040, enter the amount of your penalty on line 77. If you owe tax on line 76, add the penalty to your tax due and show your total payment on line 76. If you are due a refund, subtract the penalty from the overpayment and enter the result on line 73.

On Form 1040A, enter the amount of your penalty on line 46. If you owe tax on line 45, add the penalty to your tax due and show your total payment on line 45. If you are due a refund, subtract the penalty from the overpayment and enter the result on line 42.

Lowering or eliminating the penalty. You may be able to lower or eliminate your penalty if you file Form 2210. You must file Form 2210 with your return if any of the following applies.

You request a waiver. See Waiver of Penalty , later.
You use the annualized income installment method. See the explanation of this method under Annualized Income Installment Method (Schedule AI).
You use your actual withholding for each payment period for estimated tax purposes. See Actual withholding method under Figuring Your Underpayment (Part IV, Section A) .
You base any of your required installments on the tax shown on your 2010 return and you filed or are filing a joint return for either 2010 or 2011, but not for both years.

Exceptions

Generally, you do not have to pay an underpayment penalty if either:

Your total tax is less than $1,000, or
You had no tax liability last year.

Less Than $1,000 Due

You do not owe a penalty if the total tax shown on your return minus the amount you paid through withholding (including excess social security and tier 1 railroad retirement (RRTA) tax withholding) is less than $1,000.

Total tax for 2011. For 2011, your total tax on Form 1040 is the amount on line 61 reduced by the following.

Unreported social security and Medicare tax or RRTA tax from Forms 4137 or 8919 (line 57).
Any tax included on line 58 for excess contributions to IRAs, Archer MSAs, Coverdell education savings accounts, and health savings accounts, or any tax on excess accumulations in qualified retirement plans.
The following write-ins on line 60:
1. Uncollected social security and Medicare tax or RRTA tax on tips or group-term life insurance,
2. Tax on excess golden parachute payments,
3. Excise tax on insider stock compensation from an expatriated corporation,
4. Look-back interest due under section 167(g),
5. Look-back interest due under section 460(b),
6. Recapture of federal mortgage subsidy, and
7. Additional tax on advance payments of health coverage tax credit when not eligible.
Any refundable credit amounts listed on lines 64a, 65, 66, 67, and 70, and credits from Forms 8801 (line 27 only), 8839, and 8885 included on line 71.

If you filed Form 1040A, your 2011 total tax is the amount on line 37 reduced by any refundable credits on lines 40, 41a, 42, and 43.

If you filed Form 1040EZ, your 2011 total tax is the amount on line 10 reduced by the amount on lines 8 and 9a.

Note.

When figuring the amount on line 60, include household employment taxes only if you had federal income tax withheld from your income or you would owe the penalty even if you did not include those taxes.

Paid through withholding. For 2011, the amount you paid through withholding on Form 1040 is the amount on line 62 plus any excess social security or tier 1 RRTA tax withholding on line 69. Add to that any write-in amount on line 72 identified as “Form 8689.” On Form 1040A, the amount you paid through withholding is the amount on line 36 plus any excess social security or tier 1 RRTA tax withholding included on line 41. On Form 1040EZ, it is the amount on line 7.

No Tax Liability Last Year

You do not owe a penalty if you had no tax liability last year and you were a U.S. citizen or resident for the whole year. For this rule to apply, your tax year must have included all 12 months of the year.

You had no tax liability for 2010 if your total tax was zero or you were not required to file an income tax return.

Example.

Ray, who is single and 22 years old, was unemployed for a few months during 2010. He earned $6,700 in wages before he was laid off, and he received $1,400 in unemployment compensation afterwards. He had no other income. Even though he had gross income of $8,100, he did not have to pay income tax because his gross income was less than the filing requirement for a single person under age 65 ($9,350 for 2010). He filed a return only to have his withheld income tax refunded to him.

In 2011, Ray began regular work as an independent contractor. Ray made no estimated tax payments in 2011. Even though he did owe tax at the end of the year, Ray does not owe the underpayment penalty for 2011 because he had no tax liability in 2010.

Total tax for 2010. For 2010, your total tax on Form 1040 is the amount on line 60 reduced by the following.

Unreported social security and Medicare tax or RRTA tax from Forms 4137 or 8919 (line 57).
Any tax included on line 58 for excess contributions to IRAs, Archer MSAs, Coverdell education savings accounts, and health savings accounts, or any tax on excess accumulations in qualified retirement plans.
The following write-ins on line 60:
1. Uncollected social security and Medicare tax or RRTA tax on tips or group-term life insurance,
2. Tax on excess golden parachute payments,
3. Excise tax on insider stock compensation from an expatriated corporation,
4. Look-back interest due under section 167(g),
5. Look-back interest due under section 460(b),
6. Recapture of federal mortgage subsidy, and
7. Additional tax on advance payments of health coverage tax credit when not eligible.
Any refundable credit amounts listed on lines 63, 64a, 65, 66, and 67, and credits from Forms 8801 and 8885 included on line 71.

If you filed Form 1040A, your 2010 total tax is the amount on line 37 reduced by any refundable credits on lines 40, 41a, 42, and 43.

If you filed Form 1040EZ, your 2010 total tax is the amount on line 11 reduced by the amount on lines 8 and 9a.

Note.

When figuring the amount on line 60, include household employment taxes (prior to subtracting advance EIC payments made to your employee(s)) only if you had federal income tax withheld from your income or you would owe the penalty even if you did not include those taxes.

Figuring Your Required Annual Payment (Part I)

Figure your required annual payment in Part I of Form 2210, following the line-by-line instructions. If you rounded the entries on your tax return to whole dollars, you can round on Form 2210.

Example.

The tax on Ivy Fields' 2010 return was $12,400. Her AGI was not more than $150,000. The tax on her 2011 return (Form 1040, line 55) is $13,044. Line 56 (self-employment tax) is $8,902. Her 2011 total tax is $21,946.

For 2011, Ivy had $1,600 income tax withheld and made four equal estimated tax payments ($1,000 each). 90% of her 2011 tax is $19,751. Because she paid less than her 2010 tax ($12,400) and less than 90% of her 2011 tax ($19,751), and does not meet an exception, Ivy knows that she owes a penalty for underpayment of estimated tax. The IRS will figure the penalty for Ivy, but she decides to figure it herself on Form 2210 and pay it with her taxes when she files her tax return.

Ivy's required annual payment is $12,400 (100% of 2010 tax) because that is smaller than 90% of her 2011 tax.

Figure 4-A shows page 1 of Ivy's filled-in Form 2210. Her required annual payment of $12,400 is shown on line 9.

Different 2010 filing status. If you file a separate return for 2011, but you filed a joint return with your spouse for 2010, see 2010 joint return and 2011 separate returns , earlier, to figure the amount to enter as your 2010 tax on line 8 of Form 2210.

Short Method for Figuring the Penalty (Part III)

You may be able to use the short method in Part III of Form 2210 to figure your penalty for underpayment of estimated tax. If you qualify to use this method, it will result in the same penalty amount as the regular method. However, either the annualized income installment method or the actual withholding method, explained later, may result in a smaller penalty.

You can use the short method only if you meet one of the following requirements.

You made no estimated tax payments for 2011 (it does not matter whether you had income tax withholding).
You paid the same amount of estimated tax on each of the four payment due dates.

If you do not meet either requirement, figure your penalty using the regular method in Part IV of Form 2210 and the Penalty Worksheet in the instructions.

Note.

If any payment was made before the due date, you can use the short method, but the penalty may be less if you use the regular method. However, if the payment was only a few days early, the difference is likely to be small.

You cannot use the short method if any of the following apply.

You made any estimated tax payments late.
You checked box C or D in Part II of Form 2210.
You are filing Form 1040NR or 1040NR-EZ and you did not receive wages as an employee subject to U.S. income tax withholding.

If you use the short method, you cannot use the annualized income installment method to figure your underpayment for each payment period. Also, you cannot use your actual withholding during each period to figure your payments for each period. These methods, which may give you a smaller penalty amount, are explained under Figuring Your Underpayment (Part IV, Section A).

Completing Part III. Complete Part III of Form 2210 following the line-by-line instructions.

First, figure your total underpayment for the year (line 14) by subtracting the total of your withholding and estimated tax payments (line 13) from your required annual payment (line 10). Then figure the penalty you would owe if the underpayment remained unpaid through April 15, 2012. This amount (line 15) is the maximum estimated tax penalty on your underpayment.

Next, figure any part of the maximum penalty you do not owe (line 16) because your underpayment was paid before the due date of your return. For example, if you filed your 2011 return and paid the tax balance on March 31, 2012, you do not owe the penalty for the 15-day period from April 1 through April 15. Therefore, you would figure the amount to enter on line 16 using 15 days.

Finally, subtract from the maximum penalty amount (line 15) any part you do not owe (line 16). The result (line 17) is the penalty you owe. Enter that amount on line 77 of Form 1040 or line 46 of Form 1040A. Attach Form 2210 to your return only if you checked one of the boxes in Part II.

Example.

Assume the same facts for Ivy Fields as in the previous example. Ivy paid her estimated tax payments in four installments of $1,000 each on the dates it was due ($4,000 total).

Ivy qualifies to use the short method to figure her estimated tax penalty. Using the annualized income installment method or actual withholding will not give her a smaller penalty amount because her income and withholding were distributed evenly throughout the year. Therefore, she figures her penalty in Part III of Form 2210 (see Figure 4-A (Continued) , later) and leaves Part IV (not shown) blank.

Ivy figures her $6,800 total underpayment for the year (line 14) by subtracting the total of her withholding and estimated tax payments ($5,600) from her $12,400 required annual payment (line 10). The maximum penalty on her underpayment (line 15) is $150 ($6,800 × .02200).

Ivy plans to file her return and pay her $15,946 tax balance on March 31, 2012, 15 days before April 15. Therefore, she does not owe part of the maximum penalty amount. The part she does not owe (line 16) is figured as follows.

$6,800 × 15 × .00008 = $8

Ivy subtracts the $8 from the $150 maximum penalty and enters the result, $142, on Form 2210, line 17, and on Form 1040, line 77. She adds $142 to her $15,946 tax balance and enters the result, $16,088, on line 76 of her Form 1040. Ivy files her return on March 31 and encloses a check for $16,088. Because Ivy did not check any of the boxes in Part II, she does not attach Form 2210 to her tax return.

Regular Method for Figuring the Penalty (Part IV)

You can use the regular method in Part IV of Form 2210 to figure your penalty for underpayment of estimated tax if you paid one or more estimated tax payments earlier than the due date.

You must use the regular method in Part IV of Form 2210 to figure your penalty for underpayment of estimated tax if any of the following apply to you.

You paid one or more estimated tax payments on a date after the due date.
You paid at least one, but less than four, installments of estimated tax.
You paid estimated tax payments in un-
equal amounts.
You use the annualized income installment method to figure your underpayment for each payment period.
You use your actual withholding during each payment period to figure your payments.

Under the regular method, figure your underpayment for each payment period in Section A, then figure your penalty using the Penalty Worksheet in the Instructions for Form 2210. Enter the results on line 27 of Section B.

Figuring Your Underpayment (Part IV, Section A)

Figure your underpayment of estimated tax for each payment period in Section A following the line-by-line instructions. Complete lines 20 through 26 of the first column before going to line 20 of the next column.

Required installments—line 18. Your required payment for each payment period (line 18) is usually one-fourth of your required annual payment (Part I, line 9). This method—the regular method—is the one to use if you received your income evenly throughout the year.

However, if you did not receive your income evenly throughout the year, you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. First complete Schedule AI (Form 2210), then enter the amounts from line 25 of that schedule on line 18 of Form 2210, Part IV. See Annualized Income Installment Method (Schedule AI), later.

Payments made—line 19. Enter in each column the total of:

Your estimated tax paid after the due date for the previous column and by the due date shown at the top of the column, and
One-fourth of your withholding.

For special rules for figuring your payments, see Form 2210 instructions for line 19.

If you file Form 1040, your withholding is the amount on line 62, plus any excess social security or tier 1 RRTA tax withholding on line 69. If you file Form 1040A, your withholding is the amount on line 36 plus any excess social security or tier 1 RRTA tax withholding included in line 41.

Actual withholding method. Instead of using one-fourth of your withholding for each quarter, you can choose to use the amounts actually withheld by each due date. You can make this choice separately for the tax withheld from your wages and for all other withholding. This includes any excess social security and tier 1 RRTA tax withheld.

Using your actual withholding may result in a smaller penalty if most of your withholding occurred early in the year.

If you use your actual withholding, you must check box D in Form 2210, Part II. Then complete Form 2210 using the regular method (Part IV) and file it with your return.

Example—regular method. Ben and Sally Brown's 2011 tax after credits is $6,871 (Form 1040, line 55). Ben owes self-employment tax of $1,413. Their 2010 AGI was less than $150,000. They do not owe any other taxes. Their 2010 tax was $8,116. Go to Figure 4-B, later, to see Ben and Sally's completed Form 2210, Part I.

Ben's employer withheld $1,220 income tax and Sally's withheld $364 during 2011 ($1,584 total withholding). They paid no estimated tax for either the first or second period, but they paid $950 each on September 15, 2011, and January 15, 2012, for the third and fourth periods. Because the total of their withholding and estimated tax payments, $3,484 ($1,584 + $950 + $950), was less than both 90% of their 2011 tax (90% x $8,284 = $7,456) and 100% of their 2010 tax ($8,116), they owe a penalty for underpayment of estimated tax. They decide to figure the penalty on Form 2210 and pay it with their $4,800 tax balance ($8,284 - $3,484) when they file their tax return on April 17, 2012.

Their required annual payment (Part I, line 9) is $7,456. Because their income and withholding were distributed evenly throughout the year, they enter one-fourth of their required annual payment, $1,864, in each column of line 18 (go to Figure 4-B (Continued) , later). On line 19, they enter one-fourth of their withholding, $396, in the first two columns and $1,346 ($396 withholding (WH) + $950 estimated tax payment (EST)) in the last two columns.

They have an underpayment (line 25) for each payment period.

Worksheet for Form 2210, Part IV, Section B—Figuring Your Penalty

Figure the amount of your penalty for Section B using the Penalty Worksheet in the Form 2210 instructions. The penalty is imposed on each underpayment shown in Section A, line 25, for the number of days that it remained unpaid.

For 2011, there are four rate periods—a 4% rate is in effect from April 16, 2011 through June 30, 2011 and from July 1, 2011 through September 30, 2011, and a 3% rate is in effect from October 1, 2011 through December 31, 2011 and from January 1, 2012 through April 15, 2012. Use the Penalty Worksheet to figure the penalty and enter the result in Section B, line 27 of Form 2210.

Payments. Before completing the Penalty Worksheet, it may be helpful to make a list of the payments you made and income tax withheld after the due date (or the last day payments could be made on time) for the earliest payment period an underpayment occurred. For example, if you had an underpayment for the first payment period, list your payments after April 15, 2011. You can use the table in the Form 2210 instructions to make your list. Follow those instructions for listing income tax withheld and payments made with your return. Use the list to determine when each underpayment was paid.

If you mail your estimated tax payments, use the date of the U.S. postmark as the date of payment.

Line 1b. Apply the payments listed to underpayment balance in the first column until it is fully paid. Apply payments in the order made.

Example 1. In the previous example for Ben and Sally Brown (see Example—regular method under Figuring Your Underpayment (Part IV, Section A)), they determined that they had an underpayment for all four payment periods. See their completed Section A in Figure 4-B (Continued) , later.

Their $1,584 withholding (WH) is considered paid in four equal installments of $396, one on each payment due date. Therefore, they must make estimated tax payments (EST) of $1,468 ($1,864 required installment - $396 WH) each period. However, they made only two estimated tax payments—$950 on September 15, 2011, and $950 on January 15, 2012. They plan to file their return and pay their balance due on April 17, 2012. Ben and Sally are considered to have made the following payments for tax year 2011.

Payment Amount	Payment Date
$396 WH	4/15/11
$396 WH	6/15/11
$396 WH	9/15/11
$950 EST	9/15/11
$396 WH	1/15/12
$950 EST	1/15/12

When completing line 1b of the worksheet combine all payments made on the same date to reduce your computations.

Ben entered the underpayment amount from line 25 of Form 2210 on line 1a of their Penalty Worksheet for each column. On line 1b, column (a) he entered “6/15/11 – 396” and “9/15 – 1,072.” Their combined payment for 9/15/11 was $1,346 ($396 WH + $950 EST). They used $1,072 of the 9/15 payment to fully pay the underpayment on line 1a, column (a). He entered “9/15/11 – 274” (the remainder of their September payment) and “1/15/12 – 1,346” from January to fully pay the underpayment in column (b).

Figuring the penalty. If an underpayment was paid in two or more payments on different dates, you must figure the penalty separately for each payment. On line 3 of the Penalty Worksheet enter the number of days between the due date (line 2) and the date of each payment on line 1b. On line 4 figure the penalty for the amount of each payment applied on line 1b or the amount remaining unpaid. If no payments are applied, figure the penalty on the amount on line 1a.

Aid for counting days. Table 4-1 provides a simple method for counting the number of days between a due date and a payment date.

Find the number for the date the payment was due by going across to the column of the month the payment was due and moving down the column to the due date.
In the same manner, find the number for the date the payment was made.
Subtract the due date “number” from the payment date “number.”

For example, if a payment was due on June 15 (61), but was not paid until September 1 (139), the payment was 78 (139 – 61) days late.

Table 4-1.Calendar To Determine the Number of Days a Payment Is Late

Instructions.Use this table with Form 2210 if you are completing Part IV, Section B. First, find the number for the payment due date by going across to the column of the month the payment was due and moving down the column to the due date. Then, in the same manner, find the number for the date the payment was made. Finally, subtract the due date number from the payment date number. The result is the number of days the payment is late.

Example.The payment due date is June 15 (61). The payment was made on November 4 (203). The payment is 142 days late (203 – 61).

Tax Year 2011
Day of	2011	2011	2011	2011	2011	2011	2011	2011	2011	2012	2012	2012	2012
Month	April	May	June	July	Aug.	Sept.	Oct.	Nov.	Dec.	Jan.	Feb.	Mar.	Apr.
1		16	47	77	108	139	169	200	230	261	292	321	352
2		17	48	78	109	140	170	201	231	262	293	322	353
3		18	49	79	110	141	171	202	232	263	294	323	354
4		19	50	80	111	142	172	203	233	264	295	324	355
5		20	51	81	112	143	173	204	234	265	296	325	356
6		21	52	82	113	144	174	205	235	266	297	326	357
7		22	53	83	114	145	175	206	236	267	298	327	358
8		23	54	84	115	146	176	207	237	268	299	328	359
9		24	55	85	116	147	177	208	238	269	300	329	360
10		25	56	86	117	148	178	209	239	270	301	330	361
11		26	57	87	118	149	179	210	240	271	302	331	362
12		27	58	88	119	150	180	211	241	272	303	332	363
13		28	59	89	120	151	181	212	242	273	304	333	364
14		29	60	90	121	152	182	213	243	274	305	334	365
15	0	30	61	91	122	153	183	214	244	275	306	335	366
16	1	31	62	92	123	154	184	215	245	276	307	336
17	2	32	63	93	124	155	185	216	246	277	308	337
18	3	33	64	94	125	156	186	217	247	278	309	338
19	4	34	65	95	126	157	187	218	248	279	310	339
20	5	35	66	96	127	158	188	219	249	280	311	340
21	6	36	67	97	128	159	189	220	250	281	312	341
22	7	37	68	98	129	160	190	221	251	282	313	342
23	8	38	69	99	130	161	191	222	252	283	314	343
24	9	39	70	100	131	162	192	223	253	284	315	344
25	10	40	71	101	132	163	193	224	254	285	316	345
26	11	41	72	102	133	164	194	225	255	286	317	346
27	12	42	73	103	134	165	195	226	256	287	318	347
28	13	43	74	104	135	166	196	227	257	288	319	348
29	14	44	75	105	136	167	197	228	258	289	320	349
30	15	45	76	106	137	168	198	229	259	290		350
31		46		107	138		199		260	291		351

Example 2. Continuing from the previous example for Ben and Sally Brown (see Example 1 under Line 1b), they figure their penalty. First, they complete lines 3 and 4 for Rate Period 1, which runs from April 16, 2011, to June 30, 2011.

Penalty for first payment period (April 15, 2011)—column (a). Line 1b of their Penalty Worksheet shows “6/15/2011 – 396” and
“9/15/11 – 1,072.” $396 remained unpaid 61 days (April 16 through June 15, 2011) and $1,072 remained unpaid 76 days (April 16 through June 30, 2011). On line 3, column (a), they enter “61” and “76,” along with the date of each payment.

Next, on line 4, they figure the penalty separately for each underpayment amount, $2.65 ($396 × (61 ÷ 365) × .04) and $8.93 ($1,072 × (76 ÷ 365) × .04). See their completed Penalty Worksheet, later.

For Rate Period 2 , $1,072 of the underpayment remained unpaid for 77 days (June 30, 2011 to September 15, 2011). Ben and Sally enter “77” on line 6.

Penalty for second payment period (June 15, 2011)—column (b). Line 1b for column (b) shows “9/15/11 – 274” and “1/15/12 – 1,346.” $274 remained unpaid until June 30 (15 days). $1,346 remained unpaid until June 30. The number of days from June 15 until the end of Rate Period 1 (June 30) is 15. They enter “15” and “15” on line 3, column (b), and figure the penalty separately for each underpayment amount.

For Rate Period 2 , $274 of the underpayment remained unpaid for 77 days (June 30, 2011 to September 15, 2011), and the remaining $1,346 remained unpaid for 92 days (June 30, 2011 to September 30, 2011).

For Rate Period 3 , $1,346 of the underpayment remained unpaid for 92 days (September 30, 2011 to December 31, 2011).

For Rate Period 4 , $1,346 of the underpayment remained unpaid for 15 days (December 31, 2011 to January 15, 2012).

Penalty for third payment period (September 15, 2011)—column (c). The $1,864 underpayment on line 1a, column (c), remained fully underpaid for 15 days during the second rate period.

For Rate Period 3 , the entire balance remained unpaid for 92 days (September 30, 2011 to December 31, 2011).

For Rate Period 4 , the entire balance remained unpaid for 106 days (December 31, 2011 to April 15, 2012).

Penalty for fourth payment period (January 15, 2012)—column (d). Since all payments have been applied, the entire amount remained unpaid 91 days (January 16 through April 15, 2012). They enter that number on line 12, column (d), and figure the penalty for the $1,864 underpayment, entering it on line 13, column (d).

Total penalty. Ben and Sally's total penalty for 2011 on line 14 is $98.23, the total of all amounts on lines 4, 7, 10, and 13 in all columns. See their completed Penalty Worksheet.

Ben and Sally enter that amount on Form 2210, line 27, and on line 77 of their Form 1040. They also add $98.23 to their $4,000 tax balance and enter the $4,098.23 total on line 76. They file their return on April 17 and include a check for $4,098.23. They keep their completed Form 2210 for their records.

Annualized Income Installment Method (Schedule AI)

If you did not receive your income evenly throughout the year (for example, your income from a shop you operated at a marina was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Under this method, your required installment (Part IV, line 18) for one or more payment periods may be less than one-fourth of your required annual payment.

To figure your underpayment using this method, complete Form 2210, Schedule AI (see Figure 4-C ). Schedule AI annualizes your tax at the end of each payment period based on your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period.

If you use the annualized income installment method, you must check box C in Part II of Form 2210. Also, you must attach Form 2210 and Schedule AI to your return.

If you use Schedule AI for any payment due date, you must use it for all payment due dates.

Completing Schedule AI. Follow the Form 2210 instructions to complete Schedule AI. For each period shown on Schedule AI, figure your income and deductions based on your method of accounting. If you use the cash method of accounting (used by most people), include all income actually or constructively received during the period and all deductions actually paid during the period.

Note.

Each period includes amounts from the previous period(s).

Period (a) includes items for January 1 through March 31.
Period (b) includes items for January 1 through May 31.
Period (c) includes items for January 1 through August 31.
Period (d) includes items for the entire year.

Example. Laura Maple files as head of household with three exemptions. Her 2011 total tax (Form 1040, line 61) is $4,730, the total of her $2,384 income tax and $2,346 self-employment tax. Laura also has one refundable credit, the earned income credit (EIC) ($113). Her current year's tax is $4,617 ($4,730 − $113 refundable credits). She does not owe any other taxes. Her 2010 AGI was less than $150,000. Her 2010 tax was $4,100. Her required annual payment on Form 2210, Part I, line 9, is $4,100 (the smaller of her $4,100 tax for 2010 or 90% of her $4,617 tax after refundable credits for 2011).

Laura's employer withheld $1,236 income tax during 2011. Laura made no estimated tax payments for the first, second or third periods, but she paid $100 on January 15, 2012, for the fourth period.

Laura did not receive her income evenly throughout the year. Therefore, she decides to figure her required installment for each period (Part IV, line 18) using the annualized income installment method. To use this method, Laura completes Schedule AI before starting Part IV. Figure 4-C, later, shows Laura's filled-in Schedule AI, Part IV, and Penalty Worksheet.

Laura's wages during 2011 were $24,396 ($2,033 per month). Her net earnings from a business she started during the year was $16,600 (Schedule SE, line 2), received as follows. Laura did not have a self-employed health insurance deduction.

April through May	$ 1,000
June through August	2,500
September through December	13,100

Self-employment tax and deduction. Before Laura can figure her AGI for each period (Schedule AI, line 1), she must figure her deduction for self-employment tax for each period. To do this, she first completes Schedule AI, Part II (see Figure 4-C).

Laura had no self-employment income for the first period, so she leaves the lines in that column blank. Her self-employment income was $1,000 for the second period, $3,500 ($1,000 + $2,500) for the third period, and $16,600 ($3,500 + $13,100) for the fourth period. She multiplies each amount by 92.35% (.9235) to find the amounts to enter on line 26. She then fills out the rest of Part II.

Laura figures the deduction for self-employment tax doing the following calculations:

She multiples the amounts on line 31 by 59.6% (.596) and multiplies the amounts on line 33 by 50% (.50). She then adds these amounts together.
She then divides these amounts by the annualization amounts for each period.

The annualization amounts are:

4 for the first period,
2.4 for the second period,
1.5 for the third period, and
1 for the fourth period.

Line 1—AGI. Laura figures the amounts to enter on Schedule AI, line 1, as follows.

Column (a)—1/1/11 to 3/31/11:
$2,033 per month × 3 months		$6,099
Column (b)—1/1/11 to 5/31/11: $2,033 per month × 5 months		$10,165
Plus:	Self-employment income through 5/31/11	+ 1,000
Less:	Self-employment tax deduction ($169.08 ÷ 2.4)	− 70
		$11,095
Column (c)—1/1/11 to 8/31/11: $2,033 per month × 8 months		$16,264
Plus:	Self-employment income through 8/31/11	+ 3,500
Less:	Self-employment tax deduction ($370 ÷ 1.5)	− 247
		$19,517

Column (d)—1/1/11 to 12/31/11:
$2,033 per month × 12 months		$24,396
Plus:	Self-employment income through 12/31/11	+16,600
Less:	Self-employment tax deduction ($1,173 ÷ 1)	− 1,173
		$39,823

Line 4—Itemized deductions. Laura had $9,000 in itemized deductions for 2011—$50 per month withheld for state and local taxes, $550 per month for mortgage interest, and $150 per month in charitable contributions—for a total of $750 each month. She divided them by period in the following manner.

1st period: $2,250 ($750 × 3 months).
2nd period: $3,750 ($750 × 5 months).
3rd period: $6,000 ($750 × 8 months).
4th period: $9,000 ($750 × 12 months).

She enters each amount on line 4 in the proper column for that period.

Now that Laura has figured her entries for lines 1 and 4, she can complete the rest of Schedule AI to determine the amounts to put on Form 2210, Part IV, line 18. Laura figures her EIC on Schedule AI, line 16, for each period using her annualized earned income (Schedule AI, line 3) for that period. Figure 4-C shows her completed Parts I and II of Schedule AI.

Underpayment. Laura then figures her underpayment in Part IV, Section A (see Figure 4-C (Continued) . She finds that she overpaid her estimated tax for the first three payment periods, but underpaid her estimated tax for the last payment period. She uses the Penalty Worksheet (see Figure 4-C (Continued) ) to figure her penalty of $20.62. She enters that amount on line 27 of Form 2210 and Line 77 of her Form 1040. She also adds $20.62 to her total tax balance and enters the $2,901.62 total on line 76. She files her return on April 15 and includes a check for $2,901.62 Because she used the annualized income installment method, she must attach Form 2210, including Schedule AI, to her return and check box C in Part II.

Farmers and Fishermen

If you are a farmer or fisherman, the following special rules for underpayment of estimated tax apply to you.

The penalty for underpaying your 2011 estimated tax will not apply if you file your return and pay all the tax due by March 1, 2012. If you are a fiscal year taxpayer, the penalty will not apply if you file your return and pay the tax due by the first day of the third month after the end of your tax year.
Any penalty you owe for underpaying your 2011 estimated tax will be figured from one payment due date, January 15, 2012.
The underpayment penalty for 2011 is figured on the difference between the amount of 2011 withholding plus estimated tax paid by the due date and the smaller of:
1. 66²/₃% (rather than 90%) of your 2011 tax, or
2. 100% of the tax shown on your 2010 return.

Even if these special rules apply to you, you will not owe the penalty if you meet either of the two conditions discussed under Exceptions .

See Who Must Pay Estimated Tax in chapter 2 for the definition of a farmer or fisherman who is eligible for these special rules.

Form 2210-F. Use Form 2210-F to figure any underpayment penalty. Do not attach it to your return unless you check a box in Part I. However, if none of the boxes apply to you and you owe a penalty, you do not need to attach Form 2210-F. Enter the amount from line 16 on Form 1040 line 77 and add the penalty to any balance due on your return or subtract it from your refund. Keep your filled-in Form 2210-F for your records.

If none of the boxes on Form 2210-F apply to you and you owe a penalty, the IRS can figure your penalty and send you a bill.

Waiver of Penalty

The IRS can waive the penalty for underpayment if either of the following applies.

You did not make a payment because of a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty.
You retired (after reaching age 62) or became disabled in 2010 or 2011 and both the following requirements are met.
1. You had a reasonable cause for not making the payment.
2. Your underpayment was not due to willful neglect.

How to request a waiver. To request a waiver, complete Form 2210 as follows.

Check box A or B in Part II.
1. If you checked box A, complete only page 1 of Form 2210.
2. If you checked box B:
  1. Complete line 1 through line 16 (or lines 1 through 9 and 18 through 27 if you use the regular method) without regard to the waiver.
  2. Enter the amount you want waived in parentheses on the dotted line next to line 17 (line 27 for the regular method).
  3. Subtract this amount from the total penalty you figured without regard to the waiver. Enter the result on line 17 (line 27 for the regular method).
Attach Form 2210 and a statement to your return explaining the reasons you were unable to meet the estimated tax requirements and the time period for which you are requesting a waiver.
If you are requesting a penalty waiver due to retirement or disability, attach documentation that shows your retirement date (and your age on that date) or the date you became disabled.
If you are requesting a penalty waiver due to a casualty, disaster, or other unusual circumstance, attach documentation such as police and insurance company reports. See special procedures that apply for a Federally declared disaster later on this page.

The IRS will review the information you provide and will decide whether or not to grant your request for a waiver.

Farmers and fishermen. To request a waiver, you must complete Form 2210-F as follows.

Check box A in Part I.
Complete line 1 through line 15 without regard to the waiver.
Enter the amount you want waived in parentheses on the dotted line next to line 16.
Subtract this amount from the total penalty you figured without regard to the waiver. Enter the result on line 16.
Attach Form 2210-F and a statement to your return explaining the reasons you were unable to meet the estimated tax requirements.
If you are requesting a penalty waiver due to retirement or disability, attach documentation that shows your retirement date (and your age on that date) or the date you became disabled.
If you are requesting a penalty waiver due to a casualty, disaster, or other unusual circumstance, attach documentation such as police and insurance company reports.

The IRS will review the information you provide and will decide whether or not to grant your request for a waiver.

Federally declared disaster. Certain estimated tax payment deadlines for taxpayers who reside or have a business in a federally declared disaster area are postponed for a period during and after the disaster. During the processing of your tax return, the IRS automatically identifies taxpayers located in a covered disaster area (by county or parish) and applies the appropriate penalty relief. Do not file Form 2210 or 2210-F if your underpayment was due to a federally declared disaster. If you still owe a penalty after the automatic waiver is applied, we will send you a bill.

Individuals, estates, and trusts not in a covered disaster area but whose books, records, or tax professionals' offices are in a covered area are also entitled to relief. Also eligible are relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in a covered disaster area. If you meet either of these eligibility requirements, you must call the IRS disaster hotline at 1-866-562-5227 and identify yourself as eligible for this relief.

Details on the applicable disaster postponement period can be found at IRS.gov. Enter Tax Relief in Disaster Situations. Select the federally declared disaster that affected you.