Last March, attorney
Michael Avenatti, who is best remembered for his representation of actress
Stormy Daniels, proved that failure to make estimated tax payments is a
bad idea. In addition to being charged with providing false tax returns
for 2011-13 in order to receive $4.1 million in loans, the U.S. Attorney’s
Office in Los Angeles stated that Avenatti failed to file personal income tax
returns for those years and made no estimated tax payments in 2012 and 2013.

When you earn or
receive income throughout the year, you are obligated to pay taxes on that
money. If you receive a paycheck or a pension, tax is typically withheld from
those payments, but when your income is from sources like self-employment, you
may have to make estimated tax payments, which are a series of quarterly
prepayments based on the amount earned and its estimated tax liability.

Who
Has to Pay Estimated Tax?

Individual taxpayers
(this includes sole proprietors, partners, and shareholders in an S
corporation) are generally required to make estimated tax payments if they owe
tax from a prior year and/or expect to owe at least $1,000 in taxes when they file their
return. Corporations make these payments if they expect to owe at least $500
when their return is filed.

In general, you have
to make estimated tax payments if your income is from sources like the following:

  • Self-employment
  • Capital gains
  • Dividends
  • Financial awards and prizes

If the amount of
income tax withheld from your paycheck or pension is insufficient, you may also
have to make estimated tax payments. Failure to do so may result in penalties
that can add up quickly.

How
do Estimated Tax Payment Penalties Work?

IRS
Notice 433 explains the rate of interest applied to the underpayment
of estimated taxes as well as overpaid or underpaid taxes. As per federal law,
it is determined on a quarterly basis, and for all taxpayers except
corporations, the underpayment rate is the federal short-term rate plus three
percentage points.

According to the IRS, the rates for the
current quarter are:

  • 5% for most underpayments
  • 7% for underpayments made by large
    corporations

 If you miss a filing deadline, it will cost
you an additional 5% of the unpaid balance each month, and failing to pay what
you owe adds an extra 0.5% on top of that. If you’re unable to resolve the debt
immediately, it adds up fast.

Can
Estimated Tax Payment Penalties Be Waived?

The IRS may waive
your estimated tax payment penalties if any of the following conditions apply
to your situation:

  • You owe less than $1,000 in tax
    after all withholdings and credits are subtracted.
  • You paid at least 90% of the
    current year’s taxes or all of the taxes owed for the year before, whichever is
    smaller.
  • Your failure to make estimated
    payments were caused by unusual circumstances beyond your control, such as a
    casualty or disaster, making a penalty unfair.
  • You retired after turning 62 or
    became disabled during the tax year when you were required to make estimated
    payments, and the underpayment was not intentional.

Underpaying your
estimated taxes can lead to a significant tax debt, as you will continue to be
charged interest until your obligation is paid in full. You are allowed to
appeal the interest under certain conditions, such as evidence of mathematical
errors, but it’s a complicated process that you should only undertake with help
from an experienced tax attorney.

Speak
with a New Jersey Tax Attorney

If you are dealing
with estimated tax penalties that are unjustified and/or create a tax burden
that you can’t afford to address in full, working with a tax lawyer can result
in:

Attorney Brad
Paladini at Paladini Law holds a Master of Laws in Taxation and can
advise you on whether your situation should be resolved by a payment
arrangement, an appeal of the IRS assessment, or another form of relief. To
schedule a consultation, please call 201-381-4472 or complete our online
form.

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