Clergy must elect optional withholdings from their wages and/or make estimated tax payments evenly throughout the year. When they do not, the IRS may impose the estimated tax penalty, commonly referred to as the underpayment penalty.
There is no general reasonable-cause exception for the estimated tax penalty; therefore, it is often more difficult to get the penalty removed, but it is not impossible. The IRS may abate it if the taxpayer (1) proves that the IRS incorrectly charged the penalty or made an error, (2) shows that calculating the penalty under a different method reduces or eliminates it, or (3) proves that he or she meets the waiver criteria discussed in Sec. 6654(e)(3) (i.e., by reason of casualty, disaster, or unusual circumstances, or the taxpayer retired or became disabled during the tax year or the preceding year and the underpayment was due to reasonable cause and not willful neglect).
Here are penalty abatement tips for the estimated tax penalty:
It is fairly common for the IRS to credit a payment to the wrong tax period, causing an estimated tax penalty. Simply getting the IRS to move a payment to the correct year or period can save you from paying this penalty. It is advisable to request transcripts from the IRS each year to determine how payments and refunds are applied.
You will likely need to call the IRS at 800-829-1040 to address any payment issues. Be aware of the different methods used to calculate the penalty. For example, the penalty sometimes could be reduced or eliminated by using the annualized income installment method, which is often used if a taxpayer’s income varies during the year.
Use the safe harbor. Clergy can avoid the penalty altogether when they pay 90% of the tax shown on the current year’s return or 100% of the tax shown on the prior year’s return
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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