Timely Estimated Tax Payments Can Be Based on Late-Filed Returns

The IRS will not impose an addition to tax under Sec. 6654(a) on an individual whose timely estimated tax payments for the current tax year are based on the tax shown on a late-filed return for the preceding tax year.

An individual who underpays estimated tax is subject to an addition to tax under Sec. 6654(a). Under 6654(b)(1), an underpayment is the excess of the required installment over the amount of the installment paid on or before the installment due date. Sec. 6654(c)(1) re-quires four installments for each tax year.

In general, the amount of any required installment is 25% of the required annual payment. Under Sec. 6654(d)(1)(B)(i) and (ii), the required annual payment is the lesser of (1) 90% of the tax shown on the return for the tax year (or, if no return is filed, 90% of the tax for such year); or (2) 100% of the tax shown on the individuals return for the preceding tax year. If the adjusted gross income shown on the preceding-years return exceeds $150,000, the required annual payment is 110% of the tax shown on such return. If the preceding tax year was less than 12 months, or if the individual did not file a return for the preceding tax year, the required annual payment is 90% of the tax shown on the current-year return.

Under Regs. Sec. 1.6654-2(a)(1), the Sec. 6654 addition to tax will not be imposed if, on or before the installments due date, the total amount of all estimated tax payments made equals or exceeds the required installment amount under Sec. 6654(d)(1)(B)(ii) (i.e., the installment is based on the tax shown on the preceding-years return, provided that the preceding tax year was 12 months and a return showing a liability for tax was filed for such year).

The only nonmonetary limits on the application of Sec. 6654(d)(1)(B)(ii) are the two stated above. Neither the Code nor the regulations require the individual to have filed the preceding years return by the due date. Similarly, neither the Code nor the regulations provide that Sec. 6654(d)(1)(B)(ii) will not apply if the individual filed the preceding-years return after the due date. Thus, if an individual files a late return for the preceding tax year and pays required estimated tax installments properly predicated on the tax shown on that return, the IRS will not impose the Sec. 6654 addition to tax for an estimated tax underpayment.

Rev. Rul. 2003-23, IRB 2003-8, 511