To avoid paying interest and penalties, the Internal Revenue Service encourages taxpayers to pay their tax liability. In this article, we will go over how to assess tax liability and provide an example to illustrate it.
Section 6655(e) imposes that the estimated payment for the subsequent quarter be sufficient to cover 100% of the shortfall. A corporate taxpayer who continues to use the annualization exception for making its estimated tax payments will, in later quarters have paid in 100% of the tax due on the new annualized income. Section 6655(e) requires payment of 100% of the shortfall if this amount is paid in when income is increasing.
Here's an interpretation:
- The snow corportion, a calender year taxpayer, estimates that at the end of March 2023, it will be $800,000.
- It pays $200,000 of estimated tax by April 15, 2023, and another $200,000 on June 15, 2023.
- A recalculation at the end of August 2023 indicates that the tax for 2023 will be $900,000
- To avoid paying penalties and interest, what is the amount that snow should pay each quarter?
Based on $900,000 the each estimated installment is $225,000 ($900,000/4).
Snow paid $200,000 instead of $225,000 in first two installments. Therefore, Snow has to capture in the subsequent installmets.
- Thus, Snow's third installment would be $225,000 + $25,000 + $25,000 = $275,000.
- Whereas the fourth and the last installment would be $900,000 - $200,00 - $200,000 - $275,000 = $225,000
