Love Letter from the IRS? Don’t Panic!

Are you one of the lucky tens of thousands of American taxpayers who received a letter in error from the IRS?  If so, don’t panic!  According to Richard Neal (House Ways and Means Committee chairman, D-Mass), there were roughly 12 million pieces of unopened mail in IRS offices across the country.  This was the result of many IRS workers working from home during the pandemic.  In those enormous piles of mail are paper tax returns, correspondence, and (you guessed it!) tax payments.

The IRS has started sending out letters to address unpaid balances.  The problem is that many of those tax payments were mailed, they just remain unopened.  As taxpayers receive these letters, they panic.  However, there is no need to panic!  If you mailed a check to the IRS the first thing you should do is check your bank account.  Has the payment cleared?  If not, then there is nothing for you to do but wait.  Clarification letters are being sent out as payments are processed.  If your check has cleared and you still received the letter, we recommend calling the IRS to discuss the payment with a representative.  It may be a clerical error or the letter may have been sent before the payment was processed.

Have you received a letter from the GA Department of Revenue or another state’s taxing authority?  The first step is to call and request an explanation of the penalty.  There are two likely causes:

  1. Your payment was received after the typical April 15th deadline but before the July 15th deadline.  If the state’s system was not updated to recognize the new filing deadline this year, you may have been assessed a penalty even though your payment was not late.
  2. You had a sizeable balance due and are being penalized for failure to make estimated payments.

Why would you be penalized for not making estimated payments?  Remember that our tax system is a pay-as-you go system meaning tax is due when it is earned.  This is why W-2 employees have taxes withheld from each paycheck.  If your balance due at filing is greater than $1,000, both the IRS and state taxing authorities reserve the right to calculate a penalty for failure to make estimated payments.  For more information on estimated payments, check out our previous blog post.

Were you owed a refund that you have not yet received?  The IRS has announced that it will pay refund interest on any return filed before the July 15th deadline and that interest will be calculated from April 15th.

Estimated Payments – Who, What, When, Where, Why and How?

Some taxpayers hate making estimated payments.  Some taxpayers avoid it.  Others dread the day they might have to make them.  In reality, though, estimated payments are really not that much different than paycheck withholdings for W-2 employees.  For every paycheck received, Medicare, FICA, State, Federal, etc. is withheld from the employee’s earnings.  That money is sent off to the appropriate organization and a credit is given to the employee for payments made and are called “Withholdings.”  When that employee completes their annual tax return, they will enter the amount withheld.  If total tax due is less than the amount withheld, the balance is returned to the employee in the form of a refund.  If the amount is more, a balance is due.

For those taxpayers making estimated payments, a payment is made quarterly (instead of each pay period) and instead of being withheld from a paycheck it is paid directly from the taxpayer to the Federal and/or State government.  Just like with W-2 employees, when taxes are filed it may be determined that the taxpayer overpaid, and a refund will be issued.  Similarly, if underpayment is discovered than a balance is due.

See?  Estimated payments really aren’t all that bad!  Keep reading to learn more about the Who’s, What’s, When’s, Where’s, Why’s and How’s of estimated payments.

  • Who must make estimated payments?

Those taxpayers who expect to owe at least $1,000 in tax for the year and will have less than the expected amount withheld from their paycheck (W-2 employees) should make estimated payments.  Additionally, most self-employed and 1099-receiving taxpayers should also make estimated payments throughout the year.  Note that if you are a W-2 employee who has earnings outside of your regular job (such as investments, inheritance, a side-job, etc) you may still need to pay estimated tax in addition to what is being withheld from your paychecks.

  • What are estimated payments?

Estimated payments are not a prepayment of tax liability, despite what most people think.  Income taxes are technically due as the money is earned/received.  This is known as a pay-as-you-go system.  In other words, taxes are not due April 15th (even though tax returns are) – they’re do periodically throughout the year.  Hence estimated payments are timely payments of the tax you believe you will owe over the entirety of the year.

  • When are estimated payments due?

Estimated payments are made four times throughout the year.  Due dates are as follows:

PeriodDue Date
January 1 – March 31April 15
April 1 – May 31June 15
June 1 – August 31September 15
September 1 – December 31January 15 (of the following year)
 

  • Where do you make estimated payments?

You have many options for making your federal estimated payments – learn more here:

  1. Mailing check or money order to the Internal Revenue Service
  2. By phone
  3. Through IRS.gov by setting up direct pay with your bank account or with a debit/credit card

You may also be required to make estimated payments to the state.  Note that if you live and work in separate states you may be required to make payments in one or both states.  Check with your tax preparer or your state’s Department of Revenue for payment options and instructions.

  • Why should you make estimated payments?

First and foremost, estimated payments prevent the need to pay a large tax bill at the time you file your return.  You can wait until April 15th each year to give the IRS their cut, but which sounds easier: writing 4 checks for $2,500 or 1 check for $10,000?

The second reason is the pay-as-you-go system we mentioned earlier.  Tax isn’t due April 15 – it’s due as it’s earned.  This means that without estimated payments being made, or adequate amounts being withheld from paychecks, you may have to pay penalties even if you pay your tax liability by April 15th each year.  If total tax due after estimated payments and withholdings is less than $1,000 then penalties are typically avoided.

  • How are estimated payments calculated?

If you expect no significant changes in household income and deductible expenses from a previous year, you can divide the total tax liability calculated on your previous tax return by 4 to get your payments for the current year (this may not work for tax year 2017-2018 due to tax law changes).  If you have changed jobs, gotten married (changing your household income and filing status), had children, made investments, etc., then calculating estimated payments will likely be more complicated.  In this situation payments can be calculated by estimating your income for the coming year, calculating the taxable income, calculating the tax on that amount, and dividing that tax liability into 4 equal payments.  It is recommended that you check with your tax preparer to more accurately calculate your expected tax liability.

The IRS generally recommends that taxpayers make their estimated payments in 4 equal payments due on April 15, June 15, September 15, and January 15.  However, there are exceptions.  For example, maybe you work in an industry that is seasonal and you do not earn income evenly throughout the year.  If that is the case, you may be able to lower or avoid payment penalty by using the annualized installment method.  Learn more at IRS.gov or check with your CPA.

Think you may need to make estimated payments?  We can help!  Get in touch with Levesque & Associates for more information.