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 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 2019 or 2020, 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 indicated either code A or B in Part II. See below for Navigation.
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.
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. 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 are completing the form, continue in the program menu as follows:
- Are You Eligible to Use the Short Method? - This menu line is defaulted to Yes but you need to verify if that is correct for this return. The taxpayer can use the short method if either of two statements about estimated taxes are true and a third statement about the total underpayment for the year is true. Either:
- The taxpayer made no estimated tax payments, or
- The taxpayer made quarterly estimated payments on time and in the same amount,
- and -
- The total underpayment for the year (Line 14) was not paid on or before January 15 of the following year.
If the taxpayer is eligible to use the short method, continue in the program menu as follows:
- Underpayment Date for the 2210 Short Method - Don't select this menu line if you have no date to enter — leave it blank. The underpayment date is the date the total underpayment for the year (Line 14) was fully paid. If it was paid on or before January 15, don't complete and file Form 2210 unless reason code E applies.
- Part II - Reasons for Filing Form 2210 - Select any reasons for filing form. Note that if no reason code is selected you should not file Form 2210. Otherwise, if you select code B (electing to use the annualized income installment method) or code C (electing to treat withholdings as if they were estimated payments), you must use the regular method, not the short method.
- Part IV - Figure Your Underpayment (Regular Method) - Select the regular method if you can't use or don't want to use the short method or you aren't using the annualized method.
- Schedule AI - Part I & Part II - Select to use the annualized income installment method.
Note: This article is a guide to completing Form 2210 in the TaxSlayer Pro program. It is not intended as tax advice.