Estimated Tax Penalty

IRC Section 6655 imposes a penalty in addition to tax when a corporation (C or S), private foundation (including those organized as a trust), charitable trust, or a tax exempt organization liable for unrelated business income tax, underpays any required installments of estimated tax liabilities reportable on Forms 1120, 990 series, and certain Form 1041s. Other Form 1041s are subject to the same requirements as individuals filing Form 1040, per IRC Section 6654.

Corporation Requirements:

For tax years 198812 to 199211 corporations were required to prepay the lesser of 90% of the current year tax liability, 100% of the prior year tax liability, or the amount decided under the annualized or adjusted seasonal income installment method. The prior year must have been a 12-month taxable year with a tax liability greater than zero.

For tax years 199212 to 199305, the rate for the current year liability is 93% of the tax shown on the return, less any refundable credits.

For tax years 199306 to 199411, the current year rate is 97%.

For tax years 199412 and later, the current year rate is 100%.

Charitable trusts and private foundations filing Form 1041 are subject to the same rules as corporations, except with respect to the payment due dates.

Large Corporation

A large corporation is any corporation having a taxable income of $1,000,000 or more during any of the preceding three tax years.

A large corporation may use 100% of the prior year liability as a basis for the first installment payment only.

When the 100% prior tax base is used for the first installment, the difference between the 100% prior rate and the current rate must be added to the second installment payment.

Form 1041 Requirements (except private foundation and charitable trust):

The following fiduciaries are exempt from paying estimated tax for the tax years ending before the date two years from the date of death: Decedent’s estates, grantor trusts that receive the residual of a probate estate under the decedents will, and for tax years after 198711 (if there is no will to probate), a trust that is primarily responsible for paying taxes, debts, and expenses of administration.

The estimated tax base is the lesser of: 90% of the current tax liability, or 100% of the prior year liability if (1) the prior year was 12 months and (2) a return was filed for the prior year.

Form 1120 Installments

The installment payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year.

When the installment date falls on a weekend or legal holiday, the payment is considered timely if made on the next business day.

Payments are applied against the earliest underpayment regardless of the date the payment was received.

The installment due dates for charitable trusts and private foundations filing Form 1041 are the 15th day of the 5th, 6th 9th and 12th month of the taxable year.

Form 2220

Taxpayers use Form 2220 to compute estimated tax penalty. The taxpayer is assessed the amount shown on the Form 2220. A CP 234 is generated to the Accounts Management (Adjustments) Function to verify the penalty amount.

The estimated tax penalty is computed on the tax shown on the original taxpayer return, whether the return is filed timely or late. The penalty is not increased or decreased with later changes to the tax after the return due date without a manual adjustment to the penalty being processed.

In case of a math error, the computer is programmed to compute the penalty on the lesser amount of tax as computed by the taxpayer or corrected by the IRS.

Recomputation of ES Penalty

The computer automatically recomputes the estimated tax penalty when an adjustment to TC 806 or 807 is made or a transaction code 43X, 61X, 62X, 66X, 67X, 700, 702, 71X, 760, 762, or 97X is present or transferred in with a transaction date before the return due date.

The computer will not automatically recompute estimated tax penalty when there is a CCC P or exception 5. If CCC "A" , or a TC 170, or both are on the module, the computer will issue a CP 234 rather than posting a TC 17X.

Use CC PIEST to view the computation of a TC 176. It will show any changes to the TC 176 after inputting a credit transfer, withholding adjustment, or a refundable credit (TC 766) adjustment. If a payment is pending on the module, and ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Input Hold Code 3 if the adjustment notice will be suppressed.

The amount shown on CC PlEST is used as the ES Penalty amount on a retyped notice.

CC PIEST cannot be used if there is a TC 170 (with DLN other than return DLN), 171, or no ES Penalty charged on the tax module.

Use CC COMPAE to manually figure the ES Penalty.

Input CC COMPAE with the MFT and tax period of the return. The response format is CC COMPAS with the due date of each installment in the left column and the return due date in the right column.

Overlay the dates with the appropriate from and to dates, if necessary, and enter the underpayment amounts, then input.

More lines may be entered if payments were not made on the due dates.

Each installment date adds to the liability and each payment subtracts from the liability.

CC COMPAS can be entered directly but all dates and amounts must be filled in manually. Input COMPAS with the MFT and tax period of the return.