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
- Identify an underpayment penalty based on the heavy bias towards Q4 estimated tax payments and presumption that withholdings were equally distributed throughout the year.
- Calculate the penalty and call attention to it for the user
- 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?"
- 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.