Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
The IRS sends a CP30 notice when they charge the underpayment of estimated tax penalty on a tax return. This usually means the IRS believes you didn’t pay enough tax throughout the year through withholding, estimated tax payments, or a combination of both. If you receive this notice, review it carefully to see why the penalty was charged and whether the information is correct.
Reduce or remove the penalty
In most cases, the only option is to simply pay the penalty, but there are a few reasons that may warrant asking the IRS to reduce or remove the penalty:
- You or your spouse retired in the past 2 years after turning 62 or became disabled and you had reasonable cause.
- You had most of your income tax withheld early in the year instead of spreading it equally throughout the year.
- Your income is received unevenly during the year.
If any of the above applies, you can respond in writing by stating which exception applies to you with an explanation of how it applies and documentation to substantiate your situation. Be sure to respond by the deadline shown on the notice. Sign the letter and send it to the address at the top of your notice.
For example, if your income tax withholding was withheld early in the year, you could include the paystubs for the period when all the money was withheld. Read more information here on dealing with the penalty on Form 2210.
Avoiding the penalty
To avoid the underpayment penalty, make sure one of the following applies:
- You owe less than $1,000 in tax for the year.
- The lesser of the following:
- You paid 90% of the tax owed for the current year through timely estimated tax payments or withholding. Fishers and farmers only need to pay 66.67% for this threshold.
- You paid 100% of the prior year tax (or 110% if your AGI (adjusted gross income) is more than $150,000, or $75,000 if you are filing married filing separately) through timely estimated tax payments or withholding.
When are the estimated tax payments due?
- 1st Quarter – April 15
- 2nd Quarter – June 15
- 3rd Quarter – September 15
- 4th Quarter – January 15 (of the next year)
Example:
Joe owes $20,000 tax on the return he just filed, and he doesn’t meet any of the thresholds to reduce or remove his estimated tax penalty. He pays the CP30 penalty soon after he receives the notice.
Joe doesn’t want to pay another penalty for the upcoming year. He calculates his required estimated taxes at the beginning of the year. Because his AGI on his last return was $100,000 and he filed jointly, he’s below the threshold which would require him to pay 110% of the prior year’s tax.
To avoid the penalty, he simply needs to pay 100% of his prior year tax, which was $20,000, in the current year, and so he pays estimated tax payments of $5,000 every quarter before each of the due dates. Since it's easier to pay monthly, he pays every month with the final payment for each quarter being made by the due date.
When Joe files, it turns out he still owes $3,000 since his income increased this year. However, since he paid total estimated taxes equal to 100% of his prior year tax ($20,000), and his payments were on time every quarter, he doesn’t owe any underpayment penalty.
Key takeaways
In short, A CP30 notice can be frustrating. It means the IRS is charging a penalty because not enough tax was paid throughout the year. Start by reviewing the notice carefully to determine if it’s correct. If it’s correct, pay any amount due by the deadline. If it’s incorrect, or you think you qualify for a penalty reduction or removal, send the IRS a written response explaining why. To help avoid another CP30 notice in the future, review your withholding or estimated tax payments early each year and make timely payments as your income is earned.