Form 2210 is used by individuals (as well as estates and trusts) to determine if a penalty is owed for the underpayment of income taxes due. The form doesn't always have to be completed; the IRS will generally figure any penalty due and send the taxpayer a bill. However, the form includes a flowchart on the first page to help determine if the form should be completed, and if so, if the penalty calculation is needed.
When to file Form 2210
- To request a penalty waiver.
- To calculate and include the underpayment penalty on the return.
- To calculate the underpayment penalty using the annualized income installment method rather than the regular method.
Why are estimated payments made?
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. A taxpayer may also have to pay estimated tax if the amount of income tax being withheld from their salary, pension, or other income is not enough. Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on the tax return.
When to pay estimated taxes
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If a taxpayer does not pay enough tax by the due date of the payment periods, they may be charged a penalty for lack of timely payment even if they are due a refund when their income tax return is filed. See Waiver of Penalty below for more information regarding underpayment of tax.
The Electronic Federal Tax Payment System (EFTPS) is the easiest way to pay federal taxes for individuals as well as businesses, including federal tax deposits, installment agreement payments, and estimated tax payments. The taxpayer can elect to pay estimated taxes weekly, bi-weekly, or monthly, as long as enough is paid by the end of the quarter.
Exceptions to the penalty
On the individual tax return, the penalty may be waived if either of these is true:
- The taxpayer was a U.S. citizen or resident alien for the entire year, had no tax liability for the prior year, and the prior year tax return was (or would have been had taxpayer been required to file) for a full 12 months.
- The total tax shown on the current year's return minus the amount of tax paid through withholding is less than $1,000.
A farmer or fisher may receive an exemption if:
- Gross income from farming or fishing is at least two-thirds of their annual gross income from all sources for the current and prior tax year, and
- they filed Form 1040 or 1040-SR paying the entire tax due by March 1.
If farmer's or fisher's gross income qualifies but they failed to meet the filing requirement, use Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, to determine if they owe a penalty. Refer to the Form 2210-F instructions and its discussion of special rules that may apply. Failure to meet the Gross Income Test will require them to file Form 2210.
Waiver of Penalty
If the taxpayer has an underpayment, all or part of the penalty for that underpayment will be waived if the IRS determines that:
- In the current or prior tax year, the taxpayer retired after reaching age 62 or became disabled, and the underpayment was due to reasonable cause (and not willful neglect); or
- The underpayment was due to a casualty, federally declared disaster, or other unusual circumstance, and it would be inequitable to impose the penalty.
A waiver is requested by indicating either code A or B in Part II.
Reduction of Penalty
If taxpayer's income is received unevenly during the year, they may be able to avoid or lower the penalty by annualizing income. Complete Schedule AI to calculate the penalty using the annualized income installment method.
Navigational Steps
You may see a Diagnostic Warning in a return indicating that Form 2210 might be needed. Before working on Form 2210, ensure all federal tax withholdings and estimated payments have been entered in the return.
To access Form 2210, from the Main Menu of the tax return (Form 1040) select:
- Payment, Estimates & EIC
- Underpayment of Estimated Tax (2210)
- Prior Year Tax - Enter the prior year tax unless it has already been pulled forward from the prior year return. Enter the prior year tax multiplied by 110% if the current year's AGI is more than $150,000 (or $75,000 for MFS) and the taxpayer isn't a farmer or fisher.
Once you have entered the prior year tax, click the View button in the toolbar at the top of the window to open a PDF copy of the form. Follow the flowchart at the top of the form to determine (a) if the taxpayer will or won't owe a penalty and (b) if the IRS wants the form completed and filed or not.
If you need to complete the form, continue in the program menu as follows:
- Part II - Reasons for Filing Form 2210 - Select any reasons for filing form. Note that if no reason code is selected you should not complete Form 2210.
- You Request a Waiver - Select this reason if the taxpayer is requesting a waiver of all or part of the penalty. If they are requesting a partial waiver (reason code B), enter the amount to be waived. The amount entered will subtracted from the bottom line of the penalty calculation worksheet, with the result overriding the actual calculated amount.
- You Use the Annualized Income Installment Method - Select this reason if the taxpayer wishes to determine their required installment by the annualized income method rather than the regular method. Using the annualized income method may be advantageous if the taxpayer received income unevenly throughout the year, e.g., due to the seasonal nature of a business, or due to receiving a large capital gain at some point.
- Federal Tx/WH from Wages Treated as Estimated Tax - Select this reason if the taxpayer wishes to treat withholding as paid on the dates it was actually withheld for estimated tax purposes.
- Required Annual Payment Based on Prior Year & Status Change - Select this reason if the taxpayer filed or is filing a joint return for either the current year or the prior year, but not for both years, and the prior year tax amount you entered is smaller than 90% of the current year's tax.
- Part III - Penalty Computation - The program will complete this section for you. You only need to select it if something needs to be modified.
- Schedule AI - Part I & Part II - Select this to complete Schedule AI if the taxpayer has indicated they are using the annualized income installment method. For each menu line of income, deduction, tax, or credit you will indicate how much of the total applies to each of the first, second, and third installment periods.
Calculation difference with the IRS
If you submit Form 2210 with a tax return, don't be surprised if the IRS sends the taxpayer a letter with a slightly different calculation resulting in a lower penalty. If the return includes federal tax withholdings, the IRS knows in which quarter these were received, whereas the program is averaging them throughout the year. This will result in a difference in the penalty calculation.
Note: This article is a brief guide to completing Form 2210 in the TaxSlayer Pro program. It is not intended as tax advice. Be sure to read the IRS instructions before completing the form.
Additional Information: