Error in FreeTaxUSA estimated tax penalty calculation (Form 2210)

taxpayer94043
taxpayer94043 Member Posts: 1 Newcomer
in Filing my taxes

Hi FreeTaxUSA Team and Community,

I'm writing to report a potential issue with how FreeTaxUSA calculates the underpayment of estimated tax penalty (Form 2210). I encountered this after filing my 2024 return, where FreeTaxUSA calculated a penalty amount which I paid. However, I subsequently received a CP30 notice from the IRS assessing a significantly higher penalty.

After a detailed review with the IRS notice and the Form 2210 instructions, it appears the discrepancy stems from how payments are applied to outstanding underpayments from previous quarters. The IRS method, which is to apply any payment to the oldest outstanding underpayment first, results in a different (and in my case, higher) penalty than what FreeTaxUSA calculated.

To illustrate with example numbers (these are not my actual figures):

Let's say for 2024, the calculated underpayments (Form 2210, Part III, Section A, Line 17) were:

  • Q1 (due Apr 15): $1,000
  • Q2 (due June 17): $2,000
  • Q3 (due Sept 16): $3,000
  • Q4 (due Jan 15): $4,000

And actual estimated tax payments made were $2,500 on each of these due dates.

How FreeTaxUSA seemed to calculate (example):

  • It appeared to apply the June 17 payment primarily to the Q2 underpayment, the Sept 16 payment to the Q3 underpayment, and so on. This resulted in very short penalty periods for each underpayment if it assumed the payment cleared that specific quarter's amount.
  • For instance, if the Q1 underpayment of $1,000 was paid by the June 17 payment, that portion of the penalty calculation would stop. Then if the June 17 payment also covered the Q2 $2,000 underpayment almost immediately, the penalty on that $2,000 would be minimal. This leads to a lower overall penalty.

How the IRS calculates (and Form 2210 instructions direct):

  1. The Q1 underpayment of $1,000 is outstanding from April 15.
  2. The $2,500 payment made on June 17 is first applied to the $1,000 Q1 underpayment. This clears the Q1 underpayment as of June 17. The penalty for Q1 runs from April 15 to June 17 on $1,000.
  3. The remaining $1,500 from the June 17 payment ($2,500 - $1,000) is then applied to the Q2 required installment. If the Q2 underpayment amount listed was $2,000, this means $500 of the Q2 underpayment remains outstanding ($2,000 - $1,500).
  4. This $500 Q2 underpayment continues to accrue penalties until the September 16 payment is made.
  5. The $2,500 payment on Sept 16 is first applied to the $500 remaining Q2 underpayment. The penalty for this part of Q2 runs from June 17 to Sept 16.
  6. The remainder of the Sept 16 payment ($2,000) is applied to the Q3 requirement, and so on.

This "cascading" application of payments to the oldest underpayment first can result in underpayments from earlier quarters remaining outstanding for longer, thus accruing more penalty, which is what happened in my actual case and led to the higher IRS assessment.

The Form 2210 instructions (specifically Example 2 on page 5, and the note on the Penalty Worksheet itself) clearly state this chronological application rule. While the FreeTaxUSA penalty worksheet does include this note, the final calculation in my case did not reflect this method, leading to an underestimation of the penalty. My recalculation, following the IRS method with my actual payment dates, resulted in a penalty amount very close to what the IRS assessed.

Could you please look into how the Form 2210 penalty worksheet logic implements the rule for applying payments to the earliest outstanding underpayments? It seems this might be an area for potential refinement in the software to ensure calculations align more closely with IRS procedures and prevent surprise notices for users.

Thanks for your attention to this.

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