Estimated Tax Penalty with refunded taxes??

[M7047]

I have a client that has a small business and does estimated taxes for it. He also has some nice investments that I don't see until tax time. He's been getting a refund on his tax return, but for the last couple of years he's also received a letter with estimated tax payment penalties. How can he have estimated tax penalties, but have overpaid enough to get a refund? I'm confused.

[kathyc2]

Either they were paid late or if AGI over 75/150 110% was not paid. 

[Catherine]

There is a particular schedule they want ES payments made, with specific percentages by Date X. Miss that, and there are underpayment penalties. For one year, you could protest based on unequal income (large distributions in December due to investments), but after a year or two, they will expect the taxpayer to expect those distributions. You could try the 2210 with unequal income distribution. I've used that a time or two for clients and gotten penalties waived. But it's not guaranteed.

As for getting a refund, that's only dependent on the total paid. Think of it this way: client's total tax is $9,000, and as self-employed they make zero ES payments until January, at which time they pay in $10,000. They'll get a refund on tax, yes, but they will also have penalties for not having paid in anything the previous April, June, and September.