Pennsylvania Underpayment Penalty

[Crank]

Client received a letter from Pennsylvania claiming an underpayment penalty was due for 2018.  This was the result of a $20,000+ year-end capital gains distribution from a mutual fund.

Is this correct since there is no way to anticipate something like this as you would with earned income.  This is the first time ive seen anything like this.  Cant find anything in the Pa regs concerning this either.

[jklcpa]

You can use the exception #2 on Rev-1630 when taxable income is uneven throughout year.  This would be beneficial and help to limit the penalty since most of the income causing the underpayment was in the last quarter of the year.

[Crank]

Thank you!

[Medlin Software, Dennis]

Nice to see at least one state accepts and easily handles seasonal or unequal liability.  For my W2 wages, I typically pay the bulk of my required WH in Dec, since the bulk of my income comes in Dec.  For employees, as long as they do not get into under withholding penalty for the entire year, it is acceptable to have zero WH, and either manually deposit before the deadline, or have a large WH in Dec.  (Provides a valid W4 is in place limiting the WH.)  I inadvertently tested this some years ago when the lock in letters started.  The initial lock in letter algorithm included me, as I had zero WH for Q1, yet a fair liability for the prior year.  A phone call, and the agent reviewing my history removed the lock in.

As I move to an owner/employee role, I'll likely be able to continue my process, since my distro amount will likely be in Dec., since I will maintain more than reasonable comp for my employee "self" (keeping my SS wages up, as our daughter's future disability bene (based on me) grows a good amount each year until my FRA.

I have a note to look into CA and Fed deposit requirements for owners who have unequal distributions... which is why this thread caught my eye.

[Max W]

Does PA have a first time Penalty Abatement?

[Yardley CPA]

4 hours ago, Max W said:

Does PA have a first time Penalty Abatement?

PA has a Tax Forgiveness program.  Not sure it pertains to underpayment penalties specifically but here is some info on it:

https://www.revenue.pa.gov/FormsandPublications/FormsforIndividuals/PIT/Documents/rev-631.pdf

Tax Forgiveness

Depending on your income and family size, you may qualify for a refund or reduction of your Pennsylvania income tax liability with the state’s Tax Forgiveness program.

Retired persons and individuals that have low income and did not have PA tax withheld may have their PA tax liabilities forgiven.

For example, a family of four (couple with two dependent children) can earn up to $34,250 and qualify for Tax Forgiveness. And a single-parent, two-child family with income of up to $27,750 can also qualify for Tax Forgiveness.

Nearly one in five households qualify for Tax Forgiveness.  See if you qualify for all or part of Tax Forgiveness when you file your state income tax return. Simply file your state income tax return and include PA Schedule SP.

For more information, see the department’s brochure on the Tax Forgiveness program.

Taxpayers who qualify for PA’s Tax Forgiveness program may also qualify for the federal Earned Income Tax Credit program. For more information, visit the Internal Revenue Service’s Web site at www.irs.govOpens In A New Window or call the IRS toll-free, 1-800-829-1040.

 

[jklcpa]

@Yardley CPA Doesn't your software automatically try to calculate this?  Drake does, and as far as I remember, ATX did too during the years I used it.  The person that started this topic is an ATX user, or at least he was using it last year for the 2018 season. 

 

[Yardley CPA]

6 hours ago, jklcpa said:

@Yardley CPA Doesn't your software automatically try to calculate this?  Drake does, and as far as I remember, ATX did too during the years I used it.  The person that started this topic is an ATX user, or at least he was using it last year for the 2018 season. 

 

Hi, Judy...yes, ATX automatically calculates this.  I've had a couple clients already this year who were "forgiven".  I don't recall ever seeing it applied for underpayment penalty though.   

[jklcpa]

20 minutes ago, Yardley CPA said:

Hi, Judy...yes, ATX automatically calculates this.  I've had a couple clients already this year who were "forgiven".  I don't recall ever seeing it applied for underpayment penalty though.   

Right, and if ATX is calculating this automatically, chances are that Crank's client didn't qualify for the forgiveness unless he deleted the form, and there are other additions that must be considered that aren't included in PA taxable income that could cause the client to exceed the threshold. I know you would know this being a PA CPA, but stating the obvious for other readers.

I think Crank's course of action should be to complete the Rev-1630 using exception #2 that annualizes the uneven income that should limit the penalty to the fourth quarter and request that the penalty assessed be based on these revised calculations, if this will help his client. Read the snippet below though for more information.

13 hours ago, Max W said:

Does PA have a first time Penalty Abatement?

No, from the PA Dept of Revenue site regarding underpayments, this page includes this:

Quote

If you met the safe harbor provisions, or did not earn your income evenly, complete the REV-1630 and make a estimated payment in the quarter for which the income was earned.  The REV-1630 is designed to break out the income you received for each quarter. 

Important: If you have received a billing notice for an estimated underpayment penalty and your income was earned unevenly, AND you made an estimated payment during the quarter for which the liability was recognized, the REV-1630 would need to be completed and submitted in response to the billing notice. 

HOWEVER: If no estimated payments were made during the year, you will NOT meet any of the exceptions. Regardless of when the income was received, you will be charged the estimated underpayment penalty for the entire year.

 

[Yardley CPA]

1 hour ago, jklcpa said:

Right, and if ATX is calculating this automatically, chances are that Crank's client didn't qualify for the forgiveness unless he deleted the form, and there are other additions that must be considered that aren't included in PA taxable income that could cause the client to exceed the threshold. I know you would know this being a PA CPA, but stating the obvious for other readers.

I think Crank's course of action should be to complete the Rev-1630 using exception #2 that annualizes the uneven income that should limit the penalty to the fourth quarter and request that the penalty assessed be based on these revised calculations, if this will help his client. Read the snippet below though for more information.

 

 

Judy...your insights are very much welcome and I always appreciate reading them so please keep'em coming!