FreeTaxUSA Platform *NOT* Detecting Underpayment Penalty In All Conditions - is this a Bug?

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Trhao
Trhao Member Posts: 11 Level 2

Scenario: W2 Income for Q1 only (retired for example; Dividends, Stock sells, and Roth conversion for Q4. Estimated tax payments are very small for Q1, Q2 and Q3 with 90% of the estimated payments happening in Jan covering Q4. You slightly overpaid in either withholding or estimated taxes and are due a small refund - let's say $500.

In the above scenario, FreeTAXUSA (FTUSA) does not catch or otherwise identify or calculate an underpayment penalty. The return simply shows a full refund and you are good to go passing all quality checks.

FTUSA SHOULD

  1. Identify an underpayment penalty based on the heavy bias towards Q4 estimated tax payments and presumption that withholdings were equally distributed throughout the year.
  2. Calculate the penalty and call attention to it for the user
  3. Guide the user to Misc > Underpayment and suggest if not require the user to answer the question: "Yes | No - Do you want to answer questions that may reduce or eliminate your underpayment penalty?"
  4. If the question is not answered above, flag this as a warning at the end when running quality checks prior to filing.

If you are experienced or simply 'know better' and go to the Misc > Underpayment question and answer it with a yes or a no - THEN the penalty is detected and calculated! But you have to know to go there and trigger FTUSA to catch the penalty and calculate it. FTUSA should do this automatically. Perhaps the platform is not catching the underpayment penalty because the user is receiving a refund despite the underpayment penalty?

(For the record the user can potentially reduce or eliminate the penalty if you follow the FTUSA Form 2210 screens and enter all the quarterly income to show an annualized income consistent with estimated tax payments)

I think this is a bug. Its easy for an unsuspecting user in the scenario above to complete a return without any penalty. Submit it. And potentially be 'surprised' by an IRS penalty bill later! I suspect it's an easy fix. And if you know you should see a penalty you can 'tickle' the platform to correctly calculate the penalty and complete Form 2210.

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Comments

  • Trhao
    Trhao Member Posts: 11 Level 2
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    I just checked…

    Both TurboTax and TaxACT will, using the scenario above, detect the underpayment penalty, calculate and subtract the penalty from the refund, and call attention to it for the user. The user is guided to the Q&A optional underpayment penalty dialog and given the option of entering annualized quarterly income data in their Form 2210 dialogs.

    If the TurboTax or TaxACT user doesn't respond to the underpayment penalty question - TurboTax and TaxACT will flag this as a Warning to the user when doing a quality check at the end.

    TurboTax and TaxACT users do not have to 'induce' those platforms to find/calculate the underpayment penalty.

    I think FTUSA is 99.9% there - they simply need to either catch/calculate the penalty in the above scenario or at least steer the user to the underpayment Q&A and Warn if it's not answered (once the 1st Q&A in underpayment is answered - FTUSA starts calculating correctly) with a yes/no.

  • MatthewD
    MatthewD FreeTaxUSA Team Posts: 247
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    Hi Trhao,

    Thanks for doing the legwork on this situation and bringing it to our attention here in the community. I am putting in a request with our development team to add this sort of functionality.

    To members of our community,

    Please comment if you have seen this situation personally. Thanks!

  • CHC_Asheville
    CHC_Asheville Member Posts: 2 Level 2
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    I ran into the same situation — large end-of-year IRA distribution and estimated tax payment. No warning (that I recall) from FTUSA. Received an underpayment notice from IRS. Tried to go back into FTUSA and do "amended return" (the only way I could modify the numbers) to see if it would provide me access to a 2210 form and Schedule AI (annualized income) but I could not "trick" FTUSA into displaying it. The underpayment menu option was in fact disabled/invisible.

    I'd like to know where FTUSA does in fact support 2210 Schedule AI — if you need it — and if so, how to either "trick" FTUSA to provide it to you, or what question I am supposed to answer a certain way to get FTUSA to provide a 2210 Schedule AI to fill out.

    I had to create an Excel spreadsheet that not only duplicated 2210 Schedule AI but also the Cap Gains Worksheet that calculates the taxes — since Schedule AI makes you essentially calculate your taxes 4 different times, once for each period. What a pain!

    I would really like FTUSA to support 2210 income annualization, because I anticipate the same situation the next couple of years.

  • MatthewD
    MatthewD FreeTaxUSA Team Posts: 247
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    Hello CHC,

    The Form 2210 is supported through the Miscellaneous Topics menu (see the MISC Menu) under the heading, "Underpayment Penalty (Form 2210)". However, the link to that page will not always show when a refund is due. There really is no way to "trick" the software into showing the option.

    Thank you for your input on wanting to see that option all the time so you can calculate the penalty when you need to use the Annualize Income method. Thank you!

  • Trhao
    Trhao Member Posts: 11 Level 2
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    I don't know about accessing it via amended return but during the regular return data entry - you 'should' have been able to navigate to Misc Topics > Underpayment AFTER all of your taxes and forms are otherwise completed.

    Once there you can answer the Yes/No question of doing an annualized return.

    As soon as you answered that question it should or would have then calculated the penalty. It would then guide you to the questions to complete Form 2210.

    For FTUSA, The fix is simple: Once a return is done but before filing when running 'checks' the logic should assume the above question has been answered and run the underlying code (not ignore the underlying code until the user answers the question). If a penalty is then detected - flag it for the user to resolve or accept as is. Clearly FTUSA already has the correctly underpayment penalty calculation logic/code to handle this - FTUSA simply needs to detect and initiate this code routine under all conditions.

    I've answered the question and that triggered the FTUSA underpayment calculation code and so I'm set for this year. But other users are in the above situation - if they don't 'know' to go to Misc > Underpayments and answer the question and trigger the penalty code to properly calculate… they'll file their return perceiving it to be penalty free - then find out the hard way from the IRS not so fast, penalty has now been calculated.

  • CHC_Asheville
    CHC_Asheville Member Posts: 2 Level 2
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    I was ignorant of the need to purposefully navigate to the Misc/Underpayment section before filing my 2023 return and thus never thought to do so. It is odd, because I had a similar situation in 2022 tax year and nothing was flagged and the IRS didn't send me a notice. I guess this is what you call "a wake-up call".

  • Trhao
    Trhao Member Posts: 11 Level 2
    edited March 26
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    Well it's a bug. You should not have to: "purposefully navigate to the Misc/Underpayment section before filing" for the return to have calculated the penalty in the first place. (if your return had correctly calculated the penalty - that would have been your clue to go to Misc>Underpayment in the first place). Not that it helps you any but I'm sure others who have already filed will be getting 'suprise' penalties from the IRS too…

    But as you attempted - I would think that if you have the data for F2210 to back it up - you could file an amended return with annualized F2210 data to either mitigate or potentially eliminate the penalty?

    Just speculating - is it possible your 2022 was within safe harbor and no penalty? That or the IRS missed this penalty too?

    I hope FTUSA fixes their issue quickly (TaxAct and TurboTax catch this penalty scenario accurately). It's acknowledge and reported. At any rate - I'm really impressed by the platform and am recommending it to others! 😀

  • Trhao
    Trhao Member Posts: 11 Level 2
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    For context

    TaxAct is a bit non-intuitive in this function. Instead of having the user calculate cumulative Q1 - Q3 income based off AGI - they have the user calculate income without qualified dividends, or capital gains, … The non-qualified one is a bit odd: because that requires the user to go thru each quarter and find both ordinary and qualified and do the subtraction (which is something software thrives on - and they could do automatically). Seems tedious unnecessary for the software to force the user to do this math.

    Further - TaxAct forces users to go thru every type of income - even the ones the user clearly had zero for. The platform already knows you don't have certain types of income and should skip those dialogues.

    Finally TaxAct isn't very consistent in it's UI from screen to screen. Sometimes they arrange the boxes top to bottom, others are left to right. Some combine different boxes. Others don't. Not a good UI.

    TurboTax is similar to FTUSA in that it starts by working from the AGI and displaying the Q4 AGI data with the user filling in Q1-Q3…. FTUSA only seems to ask for those types of incomes that the user showed non-zero #s for.

    Ignoring this bug for the moment, I think I prefer the FTUSA implementation.

  • Anobix
    Anobix Member Posts: 1 Newcomer
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    This aligns with the situation I'm dealing with. I submitted my taxes without any prompt for underpayment (after taking a large end of the year IRA distribution) and received a letter in the mail from the IRS stating I owe a penalty. I've been working through Form 2210 manually now, but man does it make me feel dumb trying to put everything into the fields. It would be great if FTUSA was able to guide me through this under the Amended section. I was able to see the button for it when navigating after signing in, but it has lock next to it after having already submitted our taxes, stating it can only be seen if I Amend the taxes. But then it disappears when I get there.

  • wogsfrogs
    wogsfrogs Member Posts: 1 Newcomer
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    I've personally run into this issue. I did not notice that I needed to file a 2210, and FTUSA did not recognize an underpayment penalty.

    I filed normally, and now IRS has asked me to pay an underpayment penalty. But I think what I actually need to do is file an amended return with Form 2210 filled out. But when I try to amend my return, it won't let me fill out the form 2210 any more. The form doesn't show up at all under the Misc section when amending.

    So now I guess I am kind of stuck with doing it manually instead of with FTUSA? I'm not really sure

  • KristineS
    KristineS FreeTaxUSA Agent Posts: 119
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    Hi wogsfrogs,

    Althought FreeTaxUSA supports amended returns, our software currently does not support amending a return to include Form 2210. This is why the form does not show up in the Misc section when amending.

    The Instructions for Form 2210 include a worksheet on page 7 that can help you. When/if you file an amended return include the notation "filing to include Form 2210 originally omitted" or similar wording.