Tax Administration:

Ways to Simplify the Estimated Tax Penalty Calculation

GGD-98-96: Published: May 27, 1998. Publicly Released: May 27, 1998.

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Pursuant to a legislative requirement, GAO reviewed the: (1) Internal Revenue Code and the Internal Revenue Service (IRS) administrative requirements that cause some of the complexity associated with estimated tax (ES) penalty calculations; and (2) likely effects of corresponding changes to the requirements that would make it easier for taxpayers to calculate their ES penalties.

GAO noted that: (1) to help ensure compliance with the Internal Revenue Code and IRS administrative requirements, form 2210 requires numerous calculations to track individual ES underpayments and to determine precise ES penalty amounts; (2) GAO identified three requirements where the additional calculations did not seem to be justified because they resulted in either little or no effect on ES penalty amounts; (3) the form 2210 underpayment schedule, which currently requires that taxpayers track each underpayment individually, results in a complicated procedure, involving numerous calculations, to comply with the definition of underpayment in the Code; (4) GAO found that if taxpayers were allowed to track the accumulated underpayment amounts rather than if individual amounts and if a corresponding change were made to the ES penalty underpayment period, taxpayers could reduce the number of calculations without affecting ES penalty amounts; (5) taxpayers currently have to make additional ES penalty calculations to account for three of the four 15-day periods between ES interest rate effective dates and ES payment dates; (6) if interest rates change, this requirement increases the number of calculations taxpayers must make but only increases or decreases the penalties by small amounts; (7) in 1986, Congress eliminated this requirement for the 15-day period between April 1 and April 15 by aligning the interest rate effective date with the ES payment date; (8) similar alignments for the other three 15-day periods during the year would eliminate the calculations taxpayers must make for the 15-day periods and have little effect on ES penalty amounts; (9) to account for leap years, taxpayers currently have to make additional ES penalty calculations when underpayment balances extend either through the end of the leap year or the end of the year preceding a leap year; and (10) GAO found that, if taxpayers were allowed to use a 365-day year in all ES penalty calculations, they could eliminate the additional calculations and the penalties for the periods affected would increase by a very small amount--only 0.3 percent.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The 106th Congress did not act on this recommendation and it is unlikely that such a change would be made unless Congress enacts a tax simplification bill.

    Matter: To further simplify the ES penalty process for taxpayers, Congress should amend section 6621(b)(2)(B) of the Internal Revenue Code to include the periods June 15 through June 30, September 15 through September 30, and January 1 through January 15.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS stated that it would not consider revising the Form 2210 underpayment schedule before legislative action is taken to amend section 6621(2)(B) and expand the ES special rule to the new periods. IRS believes that expanding the special rule would provide the greatest relief to taxpayers and that revising the Form 2210 without incorporating that change would not be justified by the lesser benefits derived from revising the underpayment schedule. There is no movement in the 106 Congress to make this change as part of any tax simplification bill.

    Recommendation: To simplify the ES penalty process for taxpayers, the Commissioner of Internal Revenue should revise the form 2210 underpayment schedule to allow taxpayers to track the accumulated underpayment amount rather than individual underpayment amounts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: As of July 2008, IRS's position continues to be that it would not consider revising the Form 2210 underpayment schedule before legislative action is taken to amend section 6621(2)(B) and expand the estimated tax (ES) special rule to the new periods. IRS believes that expanding the special rule would provide the greatest relief to taxpayers and that revising the Form 2210 without incorporating that change would not be justified by the lesser benefits derived from revising the underpayment schedule. This remains the situation in April 2009. In June 2009, SI management agreed that it would be best to close this recommendation rather than continue to keep it open.

    Recommendation: To simplify the ES penalty process for taxpayers, the Commissioner of Internal Revenue should revise the form 2210 ES penalty calculation schedule to allow taxpayers to use a 365-day year in all ES penalty calculations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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