Pub. 505, Tax Withholding and Estimated Tax 
2004 Tax Year 
Chapter 4  Underpayment Penalty for 2004
This is archived information that pertains only to the 2004 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
Penalty rate. The penalty for underpayment of 2004 estimated tax is figured at an annual rate of 5% for the number of days the underpayment
remained unpaid from
April 15, 2004, through June 30, 2004; 4% from July 1, 2004, through September 30, 2004; and 5% from October 1, 2004, through
April 15, 2005.
Household employment taxes. When figuring the penalty for failure to pay estimated income tax, you generally must include with your estimated taxes any
household employment
taxes that you may have to pay.
Failure to pay estimated tax. You will not be liable for the penalty for failure to pay estimated income tax if the total tax shown on your return minus
the amount you paid
through withholding (including excess social security and railroad retirement tax withholding) is less than $1,000.
IRS will figure your penalty. You generally do not need to figure your underpayment penalty. In most cases, the IRS will figure it for you. You only need
to figure your penalty
in the following three situations.

You are requesting a waiver of part, but not all, of the penalty.

You are using the annualized income installment method to figure the penalty.

You are treating the federal income tax withheld from your wages as paid on the dates actually withheld.
If you did not pay enough tax either through withholding or by making estimated tax payments, you will have an underpayment
of estimated tax and
you may have to pay a penalty.
Having completed copies of your latest federal income tax returns may help you through this chapter.
No penalty.
Generally, you will not have to pay a penalty for 2004 if any of the following situations applies.

The total of your withholding and estimated tax payments was at least as much as your 2003 tax (or 110% of your 2003 tax if
your adjusted
gross income was more than $150,000, $75,000 if your 2004 filing status is married filing separately), and you paid all required
estimated tax
payments on time.

The tax balance due on your return is no more than 10% of your total 2004 tax, and you paid all required estimated tax payments
on time.

Your total 2004 tax (defined later) minus your withholding is less than $1,000.

You did not have a tax liability for 2003.

You did not have any withholding taxes and your current year tax less any household employment taxes is less than $1,000.
Special rules apply if you are a farmer or fisherman.
IRS can figure the penalty for you.
If you think you owe the penalty, but you do not want to figure it yourself when you file your tax return, you may
not have to. Generally, the IRS
will figure the penalty for you and send you a bill. However, you must complete Form 2210 or Form 2210F and attach it to
your return if you think you
are able to lower or eliminate your penalty. See Form 2210, later.
Topics  This chapter discusses:

The general rule for the underpayment penalty,

Special rules for certain individuals,

Exceptions to the underpayment penalty,

How to figure your underpayment and the amount of your penalty on Form 2210, and

How to ask IRS to waive the penalty.
Useful Items  You may want to see:
Form (and Instructions)

2210
Underpayment of Estimated Tax by Individuals, Estates, and Trusts

2210F
Underpayment of Estimated Tax by Farmers and Fishermen
See chapter 5 for information about getting these forms.
In general, you may owe a penalty for 2004 if the total of your withholding and estimated tax payments
did not equal at least the smaller of:

90% of your 2004 tax, or

100% of your 2003 tax. (Your 2003 tax return must cover a 12month period.)
Your 2004 tax, for this purpose, is your Total tax for 2004, defined under Exceptions, later.
Special rules for certain individuals.
There are special rules for farmers and fishermen, and for certain higher income taxpayers.
Farmers and fishermen.
If at least twothirds of your gross income for 2003 or 2004 is from farming or fishing, substitute 66⅔% for 90% in
(1) above.
See Farmers and Fishermen, later.
Higher income taxpayers.
If less than twothirds of your gross income for 2003 and 2004 is from farming or fishing and your adjusted gross
income (AGI) for 2003 was more
than $150,000 ($75,000 if your filing status is married filing a separate return in 2004), substitute 110% for 100% in (2)
above.
For 2003, AGI is the amount shown on Form 1040, line 34; Form 1040A, line 21; and Form 1040EZ, line 4.
Penalty figured for each period.
Because the penalty is figured separately for each payment period, you may owe a penalty for a payment period even
if you later paid enough to make
up the underpayment. If you did not pay enough tax by the due date of any of the payment periods, you may owe a penalty even
if you are due a refund
when you file your income tax return.
Example 4.1.
You did not make estimated tax payments for 2004 because you thought you had enough tax withheld from your wages. Early in
January 2005, you made
an estimate of your total 2004 tax. Then you realized that your withholding was $2,000 less than the amount needed to avoid
a penalty for underpayment
of estimated tax.
On January 10, you made an estimated tax payment of $3,000, which is the difference between your withholding and your estimate
of your total tax.
Your final return shows your total tax to be $50 less than your estimate, so you are due a refund.
You do not owe a penalty for your payment due January 15, 2005. However, you may owe a penalty through January 10, 2005, (the
day you made the
$3,000 payment) for your underpayments for the earlier payment periods.
Minimum required each period.
You will owe a penalty for any 2004 payment period for which your estimated tax payment plus your withholding for
the period and overpayments for
previous periods was less than the smaller of:

22.5% of your 2004 tax, or

25% of your 2003 tax. (Your 2003 tax return must cover a 12month period.)
Note.
If you are subject to the rule for higher income taxpayers, discussed earlier, substitute 27.5% for 25% in (2) above.
When penalty is charged.
If you miss a payment or you paid less than the minimum required in a period, you may be charged an underpayment penalty
from the date the amount
was due to the date the payment is made.
Trust payments of estimated tax.
If you were a beneficiary of an estate or trust that credited its estimated tax payments to you, treat the amount
credited (line 14a of Schedule
K1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, Etc.) as an estimated tax payment made by you on January
15, 2005.
Amended returns.
If you file an amended return by the due date of your original return, use the tax shown on your amended return to
figure your required estimated
tax payments. If you file an amended return after the due date of the original return, use the tax shown on the original return.
However, if you and your spouse file a joint return after the due date to replace separate returns you originally
filed by the due date, use the
tax shown on the joint return to figure your required estimated tax payments. This rule applies only if both original separate
returns were filed on
time.
2003 separate returns and 2004 joint return.
If you file a joint return with your spouse for 2004, but you filed separate returns for 2003, your 2003 tax is the
total of the tax shown on your
separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.
2003 joint return and 2004 separate returns.
If you file a separate return for 2004, but you filed a joint return with your spouse for 2003, your 2003 tax is your
share of the tax on the joint
return. You filed a separate return if you filed as single, head of household, or married filing separately.
To figure your share of the taxes on a joint return, first figure the tax both you and your spouse would have paid
had you filed separate returns
for 2003 using the same filing status as for 2004. Then multiply the tax on the joint return by the following fraction:

The tax you would have paid had you filed a separate return 

The total tax you and your spouse would have paid had you filed separate returns 
Example 4.2.
Lisa and Paul filed a joint return for 2003 showing taxable income of $49,000 and a tax of $6,654. Of the $49,000 taxable
income, $41,000 was
Lisa's and the rest was Paul's. For 2004, they file married filing separately. Lisa figures her share of the tax on the 2003
joint return as follows:
2003 Tax on $41,000 based on a separate return 
$7,066 
2003 Tax on $8,000 based on a separate return 
854 
Total 
$ 7,920 
Lisa's percentage of total
($7,066 ÷ $ 7,920) 
89.22% 
Lisa's part of tax on joint return
($6,654 × 89.22%) 
$ 5,937 
Form 2210.
In most cases, you do not need to file Form 2210. The IRS will figure the penalty for you and send you a bill. If
you want us to figure the penalty
for you, leave the penalty line on your return blank. Do not file Form 2210.
If you want to figure your penalty, complete Part I, Part II, and either Part III or Part IV of Form 2210. See Reasons for filing to
determine whether you should file Form 2210. If you use Form 2210, you cannot file Form 1040EZ.
On Form 1040, enter the amount of your penalty on line 75. If you owe tax on line 74, add the penalty to your tax
due and show your total payment
on line 74. If you are due a refund, subtract the penalty from the overpayment you show on line 71.
On Form 1040A, enter the amount of your penalty on line 48. If you owe tax on line 47, add the penalty to your tax
due and show your total payment
on line 47. If you are due a refund, subtract the penalty from the overpayment you show on line 44.
Lowering or eliminating the penalty.
You may be able to lower or eliminate your penalty if you file Form 2210. You must file Form 2210 with your return
if any of the following applies.

You request a waiver. See Waiver of Penalty, later.

You use the annualized income installment method. See the explanation of this method under Figuring Your Underpayment,
later.

You use your actual withholding for each payment period for estimated tax purposes. See Actual withholding method under
Figuring Your Underpayment, later.

You base any of your required installments on the tax shown on your 2003 return and you filed or are filing a joint return
for either 2003
or 2004 but not for both years.
Generally, you do not have to pay an underpayment penalty if either of the following conditions apply:

Your total tax is less than $1,000, or

You had no tax liability last year.
You do not owe a penalty if the total tax shown on your return minus the amount you paid through withholding (including excess
social security and
railroad retirement tax withholding) is less than $1,000.
Total tax for 2004.
For 2004, your total tax on Form 1040 is the amount on line 62 reduced by the total of the following amounts.

Any recapture of a federal mortgage subsidy from Form 8828 included on line 62.

Any social security or Medicare tax on tips not reported to your employer on line 58.

Any tax on excess contributions to IRAs, Archer MSAs, Coverdell education savings accounts, and health savings accounts, and
any tax on
excess accumulations in qualified retirement plans from Form 5329 included on line 59.

Any uncollected social security, Medicare, or railroad retirement tax included on line 62.

Any tax on golden parachute payments included on line 62.

Any excise tax on insider stock compensation from an expatriated corporation included on line 62.

Any earned income credit on line 65a.

Any additional child tax credit on line 67.

Any credit for federal tax on fuels from Form 4136 included on line 69.

Any health coverage tax credit from Form 8885 included on line 69.
Your total tax on Form 1040A is the amount on line 38 minus the amount on lines 41a and 42. Your total tax on Form
1040EZ is the amount on line 10
minus the amount on line 8a.
Paid through withholding.
For 2004, the amount you paid through withholding on Form 1040 is the amount on line 63 plus any excess social security
or railroad retirement tax
withholding on line 66. On Form 1040A, the amount you paid through withholding is the amount on line 39. On Form 1040EZ, it
is the amount on line 7.
No Tax Liability Last Year
You do not owe a penalty if you had no tax liability last year and you were a U.S. citizen or resident for the whole year.
For this rule to apply,
your tax year must have included all 12 months of the year.
You had no tax liability for 2003 if your total tax was zero or you did not need to file an income tax return.
Example 4.3.
Ray, who is single and 22 years old, was unemployed for most of 2003. He earned $2,700 in wages before he was laid off, and
he received $2,500 in
unemployment compensation afterwards. He had no other income. Even though he had gross income of $5,200, he did not have to
pay income tax because his
gross income was less than the filing requirement for a single person under age 65 ($7,800 for 2003). He filed a return only
to have his withheld
income tax refunded to him.
In 2004, Ray began regular work as an independent contractor. Ray made no estimated tax payments in 2004. Even though he did
owe tax at the end of
the year, Ray does not owe the underpayment penalty for 2004 because he had no tax liability in 2003.
Total tax for 2003.
For 2003, your total tax on Form 1040 is the amount on line 60 reduced by the total of the following amounts.

Any recapture of a federal mortgage subsidy from Form 8828 included on line 60.

Any social security or Medicare tax on tips not reported to your employer on line 56.

Any tax on excess contributions to IRAs, Archer MSAs, and Coverdell education savings accounts, and any tax on excess accumulations
in
qualified retirement plans from Form 5329 included on line 57.

Any uncollected social security, Medicare, or railroad retirement tax included on line 60.

Any tax on golden parachute payments included on line 60.

Any earned income credit on line 63.

Any additional child tax credit on line 65.

Any credit for federal tax on fuels from Form 4136 included on line 67.

Any health coverage tax credit from Form 8885 included on line 67.
Your total tax on Form 1040A is the amount on line 38 minus the amount on lines 41 and 42. Your total tax on Form
1040EZ is the amount on line 10
minus the amount on line 8.
Figuring Your Required Annual Payment
Figure your required annual payment in Part I of Form 2210, following the linebyline instructions. If you rounded the entries
on your return to
whole dollars, you can round on Form 2210.
Example 4.4.
The tax on Ivy Fields' 2003 return was $10,000. Her AGI was not more than $150,000. The tax on her 2004 return (Form 1040,
line 43) is $11,000. She
does not claim any credits or pay any other taxes.
For 2004, Ivy had $1,600 income tax withheld and paid $6,800 estimated tax. Her total payments were $8,400. 90% of her 2004
tax is $9,900. Because
she paid less than her 2003 tax and less than 90% of her 2004 tax, and does not meet an exception, Ivy knows that she owes
a penalty for underpayment
of estimated tax. The IRS will figure the penalty for Ivy, but she decides to figure it herself on Form 2210 and pay it with
her $2,600 tax balance
when she files her tax return.
Ivy's required annual payment is $9,900 ($11,000 × 90%) because that is smaller than her 2003 tax.
Page 1 of Ivy's filledin Form 2210 is shown at the end of this chapter. Her required annual payment of $9,900 is shown on
line 9.
Different 2003 filing status.
If you file a separate return for 2004, but you filed a joint return with your spouse for 2003, see 2003 joint return and 2004 separate
returns, earlier, to figure the amount to enter as your 2003 tax on line 8 of Form 2210.
Short Method for Figuring the Penalty
You may be able to use the short method in Part III of Form 2210 to figure your penalty for underpayment of estimated tax.
If you qualify to use
this method, it will result in the same penalty amount as the regular method. However, either the annualized income installment
method or the actual
withholding method, explained later, may result in a lower penalty.
You can use the short method only if you meet one of the following requirements.

You made no estimated tax payments for 2004 (it does not matter whether you had income tax withholding), or

You paid estimated tax in four equal amounts on the due dates.
If you do not meet either requirement, figure your penalty using the regular method in Part IV, Form 2210.
Note.
If any payment was made before the due date, you can use the short method, but the penalty may be less if you use the regular
method. If the
payment was only a few days early, the difference is likely to be small.
You cannot use the short method if any of the following applies.

You made any estimated tax payments late.

You checked box C or D in Part II of Form 2210.

You are filing Form 1040NR or 1040NREZ and you did not receive wages as an employee subject to U.S. income tax withholding.
If you use the short method, you cannot use the annualized income installment method to figure your underpayment for each
payment period. Also, you
cannot use your actual withholding during each period to figure your payments for each period. These methods, which may give
you a smaller penalty
amount, are explained later under Figuring Your Underpayment.
Completing Part III.
Complete Part III of Form 2210 following the linebyline instructions.
First, figure your total underpayment for the year (line 14) by subtracting the total of your withholding and estimated
tax payments (line 13) from
your required annual payment (Part I, line 9). Then figure the penalty you would owe if the underpayment remained unpaid up
to April 15, 2005. This
amount (line 15) is the maximum estimated tax penalty on your underpayment.
Next, figure any part of the maximum penalty you do not owe (line 16) because your underpayment was paid before the
due date of your return. For
example, if you filed your 2004 return and paid the tax balance on April 3, 2005, you do not owe the penalty for the 12day
period from April 4
through April 15. Therefore, you would figure the amount to enter on line 16 using 12 days.
Finally, subtract from the maximum penalty amount (line 15) any part you do not owe (line 16). The result (line 17)
is the penalty you owe. Enter
that amount on line 75 of Form 1040 or line 48 of Form 1040A. Attach Form 2210 to your return only if you checked one of the
boxes in Part II.
Example 4.5.
The facts are the same as in Example 4.4. Ivy paid her estimated tax payments in four installments of $1,700 ($6,800 ÷ 4) each on
the dates they were due.
Ivy qualifies to use the short method to figure her estimated tax penalty. Using the annualized income installment method
or actual withholding
will not give her a smaller penalty amount because her income and withholding were distributed evenly throughout the year.
Therefore, she figures her
penalty in Part III of Form 2210 and leaves Part IV (not shown) blank.
Ivy figures her $1,500 total underpayment for the year (line 14) by subtracting the total of her withholding and estimated
tax payments ($8,400)
from her $9,900 required annual payment (Part I, line 9). The maximum penalty on her underpayment (line 15) is $48 ($1,500
× .03184).
Ivy plans to file her return and pay her $2,600 tax balance on March 16, 2005, 30 days before April 15. Therefore, she does
not owe part of the
maximum penalty amount. The part she does not owe (line 16) is figured as follows.
$1,500 × 30 × .00014 = $6 
Ivy subtracts the $6 from the $48 maximum penalty and enters the result, $42, on line 17 and on line 75 of her Form 1040.
She adds $42 to her
$2,600 tax balance and enters the result, $2,642 on line 74 of her Form 1040. Ivy files her return on March 16 and attaches
a check for $2,642.
Because Ivy did not check any of the boxes in Part II, she does not attach Form 2210 to her tax return.
Ivy's filledin Form 2210, Part III is shown at the end of this chapter.
Regular Method for Figuring the Penalty
You must use the regular method in Part IV of Form 2210 to figure your penalty for underpayment of estimated tax if any of
the following apply to
you.

You paid one or more estimated tax payments on a date other than the due date.

You paid at least one, but less than four, installments of estimated tax.

You paid estimated tax payments in unequal amounts.

You use the annualized income installment method to figure your underpayment for each payment period.

You use your actual withholding during each payment period to figure your payments.
If you use the regular method, figure your underpayment for each payment period in Section A, then figure your penalty for
each payment period in
Section B.
Figuring Your Underpayment (Section A of Part IV)
Figure your underpayment of estimated tax for each payment period in Section A following the linebyline instructions. Complete
each line for a
payment period column before completing the next column.
Required installment.
Your required payment for each payment period (line 18) is usually onefourth of your required annual payment (Part
I, line 9). However, if you are
using the annualized income installment method (described later), first complete Schedule AI (Form 2210), and then enter the
amounts from line 25 of
that schedule on line 18 of Form 2210.
Payments.
On line 19, enter in each column the total of:

Your estimated tax paid after the due date for the previous column and by the due date shown, and

Onefourth of your withholding.
For special rules for figuring your payments, see the instructions for Form 2210.
If you file Form 1040, your withholding is the amount on line 63, plus any excess social security or railroad retirement
tax withholding on line
66. If you file Form 1040A, your withholding is the amount on line 39.
Actual withholding method.
Instead of using onefourth of your withholding for each quarter, you can choose to use the amounts actually withheld
by each due date. You can
make this choice separately for the tax withheld from your wages and for all other withholding.
Using your actual withholding may result in a smaller penalty if most of your withholding occurred early in the year.
If you use your actual withholding, you must check box D, Part II of Form 2210 and complete Form 2210 and file it
with your return.
Regular Installment Method
Example 4.6.
Ben Brown's 2004 total tax (Form 1040, line 62) is $7,031, the total of his $4,685 income tax and $2,346 selfemployment tax.
His 2003 AGI was less
than $150,000. He does not owe any other taxes or claim any credits other than for withholding. His 2003 tax was $6,116.
Ben's employer withheld $3,228 income tax during 2004. Ben paid no estimated tax for either the first or second period, but
he paid $1,000 each on
September 2, 2004, and January 12, 2005, for the third and fourth periods. Because the total of his withholding and estimated
tax payments, $5,228
($3,228 + $1,000 + $1,000), was less than 90% of his 2004 tax ($6,328), and was also less than his 2003 tax ($6,116), Ben
knows he owes a penalty for
underpayment of estimated tax. He decides to figure the penalty on Form 2210 and pay it with his $1,803 tax balance ($7,031
 $5,228) when he
files his tax return on April 15, 2005.
Ben's required annual payment (Part I, line 9) is $6,116. Because his income and withholding were distributed evenly throughout
the year, Ben
enters onefourth of his required annual payment, $1,529, in each column of line 18. On line 19, he enters onefourth of his
withholding, $807 in the
first two columns and $1,807 ($807 plus $1,000 estimated tax payment) in the last two columns.
Ben has an underpayment (line 25) for each payment period even though his withholding and estimated tax payments for the third
and fourth periods
were more than his required installments (line 18). This is because the estimated tax payments made in the third and fourth
periods are first applied
to underpayments for the earlier periods. Page 1 and Section A of Part IV of Ben's Form 2210 are shown at the end of this
chapter.
Annualized Income Installment Method (Schedule AI)
If you did not receive your income evenly throughout the year (for example, your income from a repair shop you operated was
much larger in the
summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment
using the annualized
income installment method. Under this method, your required installment (line 18) for one or more payment periods may be less
than onefourth of your
required annual payment.
To figure your underpayment using this method, complete Schedule AI of Form 2210. The schedule annualizes your tax at the
end of each payment
period based on your income, deductions, and other items relating to events that occurred since the beginning of the tax year
through the end of the
period.
If you use the annualized income installment method, you must check box C on Form 2210. You also must attach Form 2210 and
Schedule AI to your
return.
If you use Schedule AI for any payment due date, you must use it for all payment due dates.
Table 4–1. Calendar To Determine the Number of Days a Payment Is Late
Instructions. Use this table with Form 2210 if you are completing Part IV, Section B, or Schedule AI, Part IV, Section B. First,
find the number for the payment due date by going across to the column of the month the payment was due and moving down the
column to the due date.
Then, in the same manner, find the number for the date the payment was made. Finally, subtract the due date number from the
payment date number. The
result is the number of days the payment is late.
Example. The payment due date is June 15 (61). The payment was made on November 4 (203). The payment is 142 days late
(203–61).
Tax Year 2004 
Day of 
2004 
2004 
2004 
2004 
2004 
2004 
2004 
2004 
2004 
2005 
2005 
2005 
2005 
Month 
April 
May 
June 
July 
Aug. 
Sept. 
Oct. 
Nov. 
Dec. 
Jan. 
Feb. 
Mar. 
Apr. 
1 

16 
47 
77 
108 
139 
169 
200 
230 
261 
292 
320 
351 
2 

17 
48 
78 
109 
140 
170 
201 
231 
262 
293 
321 
352 
3 

18 
49 
79 
110 
141 
171 
202 
232 
263 
294 
322 
353 
4 

19 
50 
80 
111 
142 
172 
203 
233 
264 
295 
323 
354 
5 

20 
51 
81 
112 
143 
173 
204 
234 
265 
296 
324 
355 














6 

21 
52 
82 
113 
144 
174 
205 
235 
266 
297 
325 
356 
7 

22 
53 
83 
114 
145 
175 
206 
236 
267 
298 
326 
357 
8 

23 
54 
84 
115 
146 
176 
207 
237 
268 
299 
327 
358 
9 

24 
55 
85 
116 
147 
177 
208 
238 
269 
300 
328 
359 
10 

25 
56 
86 
117 
148 
178 
209 
239 
270 
301 
329 
360 














11 

26 
57 
87 
118 
149 
179 
210 
240 
271 
302 
330 
361 
12 

27 
58 
88 
119 
150 
180 
211 
241 
272 
303 
331 
362 
13 

28 
59 
89 
120 
151 
181 
212 
242 
273 
304 
332 
363 
14 

29 
60 
90 
121 
152 
182 
213 
243 
274 
305 
333 
364 
15 
0 
30 
61 
91 
122 
153 
183 
214 
244 
275 
306 
334 
365 














16 
1 
31 
62 
92 
123 
154 
184 
215 
245 
276 
307 
335 

17 
2 
32 
63 
93 
124 
155 
185 
216 
246 
277 
308 
336 

18 
3 
33 
64 
94 
125 
156 
186 
217 
247 
278 
309 
337 

19 
4 
34 
65 
95 
126 
157 
187 
218 
248 
279 
310 
338 

20 
5 
35 
66 
96 
127 
158 
188 
219 
249 
280 
311 
339 















21 
6 
36 
67 
97 
128 
159 
189 
220 
250 
281 
312 
340 

22 
7 
37 
68 
98 
129 
160 
190 
221 
251 
282 
313 
341 

23 
8 
38 
69 
99 
130 
161 
191 
222 
252 
283 
314 
342 

24 
9 
39 
70 
100 
131 
162 
192 
223 
253 
284 
315 
343 

25 
10 
40 
71 
101 
132 
163 
193 
224 
254 
285 
316 
344 















26 
11 
41 
72 
102 
133 
164 
194 
225 
255 
286 
317 
345 

27 
12 
42 
73 
103 
134 
165 
195 
226 
256 
287 
318 
346 

28 
13 
43 
74 
104 
135 
166 
196 
227 
257 
288 
319 
347 

29 
14 
44 
75 
105 
136 
167 
197 
228 
258 
289 

348 

30 
15 
45 
76 
106 
137 
168 
198 
229 
259 
290 

349 















31 

46 

107 
138 

199 

260 
291 

350 

Completing Schedule AI of Form 2210.
Follow your Form 2210 instructions to complete Schedule AI. For each period shown on Schedule AI, figure your income
and deductions based on your
method of accounting. If you use the cash method of accounting (used by most people), include all income actually or constructively
received during
the period and all deductions actually paid during the period.
Note.
Each period includes amounts from the previous period(s).

Period (a) includes items for January through March.

Period (b) includes items for January through May.

Period (c) includes items for January through August.

Period (d) includes items for the entire year.
Example 4.7.
Betty Beige is in the same situation as Ben Brown in Example 4.6, except that her income tax is $3,741. Her required annual payment on
Form 2210, Part I, line 9 is $5,478 (the lower of her $6,116 tax for 2003 or 90% of her $6,087 total tax for 2004). Betty
did not receive her income
evenly throughout the year. Therefore, she decides to figure her required installment for each period (line 18 of Form 2210)
using the annualized
income installment method.
Betty's filledin Schedule AI and Section A of Part IV of Form 2210 using this method are shown at the end of this
chapter.
Betty's wages during 2004 were $21,000 ($1,750 a month). Her net earnings from a business she started during the year
were $16,600, received as
follows:
April through May 
$4,600 
June through August 
4,000 
September through December 
8,000 
Before Betty can figure her adjusted gross income for each period (line 1 of Schedule AI), she must figure her deduction
for selfemployment tax
for each period. She completes Part II of Schedule AI first. She figures the deduction for selfemployment tax by dividing
the amounts on line 34 by
the annualization amounts for each period. The annualization amounts are 8 for the first period, 4.8 for the second period,
3 for the third period,
and 2 for the fourth period.
Betty had $6,000 in itemized deductions for 2004. She divided them by period in the following manner.

1st period ($1,500). $250 a month withheld in state and local taxes, and $250 a month in mortgage interest X 3 months.

2nd period ($2,500). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 5 months.

3rd period ($4,000). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 8 months.

4th period ($6,000). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 12 months.
She enters each amount on line 4 in the proper column for that period.
Betty had no selfemployment income for the first period, so she leaves the lines in that column blank. Her selfemployment
income was $4,600 for
the second period, $8,600 ($4,600 + $4,000) for the third period, and $16,600 ($8,600 + $8,000) for the fourth period. She
multiplies each amount by
92.35% (.9235) to find the amounts to enter on line 26. She then fills out the rest of Part II.
Betty figures the amounts to enter on line 1 of Schedule AI as follows:
1st Column—1/1/04 to 3/31/04: 

$1,750 per month × 3 months 
$5,250 
2nd Column—1/1/04 to 5/31/04:
$1,750 per month × 5 months 
$8,750 
Plus: 
Selfemployment income through 5/31/04 
4,600 
Less: 
Selfemployment tax deduction ($1,560 ÷ 4.8) 
(325) 



$13,025 
3rd Column—1/1/04 to 8/31/04:
$1,750 per month × 8 months 
$14,000 
Plus: 
Selfemployment income through 8/31/04 
8,600 
Less: 
Selfemployment tax deduction ($1,822 ÷ 3) 
(607) 



$21,993 
4th Column—1/1/04 to 12/31/04: 

$1,750 per month × 12 months 
$21,000 
Plus: 
Selfemployment income through 12/31/04 
16,600 
Less: 
Selfemployment tax deduction ($2,346 ÷ 2) 
(1,173) 



$36,427 
Betty completes the rest of Schedule AI to determine the amounts to put on Form 2210, line 18.
Betty then figures her underpayment in Part IV, Section A. She finds that she overpaid her estimated tax for the first
and third payment periods,
but she underpaid her estimated tax for the other two periods. Example 4.9 illustrates how Betty completes Part IV, Section B, of her Form
2210.
Figuring Your Penalty (Section B of Part IV)
Figure the amount of your penalty in Section B, Part IV of Form 2210, following the instructions. The penalty is imposed on
each underpayment shown
on line 25, Section A, for the number of days that it remained unpaid. (You may find it helpful to show the date of payment
beside each amount on line
25.)
There are four rate periods to figure the penalty. Use Rate Period 1 (lines 27 and 28) to apply the 5% rate in effect between April 16,
2004, and June 30, 2004. Use Rate Period 2 (lines 29 and 30) to apply the 4% rate in effect between July 1, 2004, and September 30, 2004.
Use Rate Period 3 (lines 31 and 32) to apply the 5% rate in effect between October 1, 2004, and December 31, 2004. Use Rate Period
4 (lines 33 and 34) to apply the 5% rate in effect between January 1, 2005, and April 15, 2005.
Aid for counting days.
Table 4–1 provides a simple method to count the number of days between payment dates or between a due date and a payment
date.

Find the number for the date the payment was due by going across to the column of the month the payment was due and moving
down the column
to the due date.

In the same manner, find the number for the date the payment was made.

Subtract the due date “number” from the payment date “number.”
For example, if a payment was due on June 15 (61), but was not paid until November 4 (203), the payment was 142 (203
 61) days late.
Payments.
Before completing Section B, make a list of the payments you made after the due date (or the last day payments could
be made on time) for the
earliest payment period an underpayment occurred. For example, if you had an underpayment for the first payment period, list
your payments after April
15, 2004. You can use the tables in the Form 2210 instructions to make your list. Follow those instructions for listing income
tax withheld and
payments made with your return. Use the list to determine when each underpayment was paid.
Underpayment paid in two or more parts.
If an underpayment was paid in two or more parts on different dates, you must figure the penalty separately for each
part. (You may find it helpful
to show the underpayment on line 25, Section A, broken down into the parts paid on different dates.)
Figuring the penalty.
Form 2210 for 2004 has 4 rate periods. Figure the underpayment penalty by applying the appropriate rate against each
underpayment shown on line 25. If an underpayment remained unpaid for more than one rate period, the penalty on that underpayment
will be figured
using more than one rate.
Use lines 27, 29, 31, and 33 to figure the number of days the underpayment remained unpaid. (Also see Table 4–1.)
Use lines 28, 30, 32, and
34 to figure the actual penalty amount by applying the rate against the underpayment for the number of days it remained unpaid.
If an underpayment remained unpaid for the entire period, use Table 4–2 to determine the number of days to enter for
each period.
<emphasis role="bold">Table 4–2</emphasis> Chart of Total Days

Column
(a) 
Column
(b) 
Column
(c) 
Column
(d) 
line 27 
76 
15 
NA 
NA 
line 29 
92 
92 
15 
NA 
line 31 
92 
92 
92 
NA 
line 33 
105 
105 
105 
90 
Example 4.8.
In Example 4.6, Ben Brown determined that he had an underpayment for all four payment periods.
Section B of Part IV of Form 2210 is shown at the end of this chapter.
Ben's 2004 tax is $7,031. His minimum required payment for each period is $1,529 ($6,116 ÷ 4). His $3,228 withholding
is considered paid in
four equal installments of $807, one on each payment due date. Therefore, he must make estimated tax payments of $722 each
period. Ben made estimated
tax payments of $1,000 on September 2, 2004, and $1,000 on January 12, 2005. He plans to file his return and pay his $1,803
tax balance ($7,031 tax
– $5,228 withholding and estimated tax payments) on April 15, 2005. Therefore, he is considered to have made the following
payments for tax year
2004.

April 15, 2004 
$ 807 


June 15, 2004 
807 


September 2, 2004 
1,000 


September 15, 2004 
807 


January 12, 2005 
1,000 


January 15, 2005 
807 


April 15, 2005 
1,803 

Penalty for first period (April 15, 2004) – column (a).
Ben's $722 underpayment for the first payment period was paid by applying $722 of his $807 payment on June 15, 2004.
The $722 remained unpaid 61
days (April 16 through June 15, 2004). Ben enters “ 61” on line 27 and figures this part of the penalty on line 28.
Penalty for second period (June 15, 2004) – column (b).
Ben figures his second period underpayment as follows.

Of the $807 he paid for the second period, $722 is applied to the underpayment remaining from the first period.

That leaves $85 ($807 – $722) to apply to his second period required installment of $1,529.

The result, $1,444 ($1,529  $85) is Ben's underpayment for the second period.
The $1,444 underpayment is paid in two parts by applying the $1,000 paid on September 2 and $444 of his $807 September
15 payment. To help him
figure his penalty, Ben shows each part of the underpayment paid on different dates on line 25.
For Rate Period 1, the entire underpayment remained unpaid 15 days (June 16 through June 30). Ben enters “ 15” on line 27 and
figures this part of his penalty on line 28.
For Rate Period 2, $1,000 of the underpayment remained unpaid for 64 days (July 1 through September 2) and $444 remained unpaid for 77
days (July 1 through September 15). Ben enters “ 64” and “ 77” on line 29. He figures this part of the penalty on line 30 by adding the result
of the two penalty computations.
Penalty for third period (September 15, 2004) – column (c).
Ben figures his third period underpayment as follows.

Of the $1,807 he paid for the third period, $1,444 is applied to the underpayment remaining from the second period.

That leaves $363 ($1,807  $1,444) to apply to his third period required installment of $1,529.

The result, $1,166 ($1,529  $363) is Ben's underpayment for the third period.
The $1,166 underpayment is paid in two parts by applying his $1,000 payment on January 12, 2005, and $166 of his $807
payment on January 15. On
line 25, Ben shows each part of the underpayment paid on different dates.
For Rate Period 2, the entire underpayment remained unpaid 15 days (September 16 through September 30). Ben enters “ 15” on line 29
and figures this part of his penalty on line 30.
For Rate Period 3, the entire underpayment remained unpaid 92 days (October 1 through December 31). Ben enters “ 92” on line 31 and
figures this part of his penalty on line 32.
For Rate Period 4, $1,000 of the underpayment remained unpaid for 12 days (January 1 through January 12) and $166 remained unpaid for 15
days (January 1 through January 15). Ben enters “ 12” and “ 15” on line 33 and figures his penalty for each part of the underpayment on line
34. He includes all penalty amounts on line 34.
Penalty for fourth period (January 15, 2005) – column (d).
Ben figures his fourth period underpayment as follows.

Of the $1,807 he paid for the fourth period, $1,166 is applied to the underpayment remaining from the third period.

That leaves $641 ($1,807  $1,166) to apply to his fourth period required installment of $1,529.

The result, $888 ($1,529  $641) is Ben's underpayment for the fourth period.
The $888 underpayment was paid April 15, 2005, with his tax return. The $888 remained unpaid 90 days (January 16 through
April 15, 2005). Ben
enters that number on line 33 and figures his penalty on line 34.
Total penalty.
Ben's total penalty for 2004 on line 35 is $49.20, the total of all amounts on lines 28, 30, 32, and 34 in all columns.
Ben enters that amount on
line 75 of his Form 1040. He also adds $49 to his $1,803 tax balance and enters the $1,852 total on line 74. He files his
return on April 15 and
includes a check for $1,852. He keeps his completed Form 2210 for his records.
Example 4.9.
In Example 4.7, Betty Beige's first underpayment was for the second payment period.
This example illustrates completion of Part IV, Section B, of Betty's Form 2210 under the annualized income installment
method. Section B of Part
IV of Form 2210 is shown at the end of this chapter.
Betty made the same payments listed in the table in Example 4.8 except that her final payment on April 15, 2005, was $859.
Penalty for second period – column (b).
Betty's $424 underpayment for the second payment period was paid by applying $424 of her $1,000 September 2, 2004,
payment. To help her figure her
penalty, Betty shows the date the underpayment was paid on line 25.
For Rate Period 1, the entire underpayment remained unpaid for 15 days (June 16 through June 30). Betty enters “ 15” on line 27 and
figures this part of her penalty on line 28.
For Rate Period 2, the entire underpayment remained unpaid for 64 days (July 1 through September 2). Betty enters “ 64” on line 29
and figures this part of her penalty on line 30.
Penalty for fourth period – column (d).
Betty's $250 underpayment for the fourth payment period was paid on April 15, 2005, with her tax return. The entire
amount remained unpaid 90 days
(January 16 through April 15, 2005). Betty enters that number on line 33 and figures this part of her penalty on line 34.
Total penalty.
Betty's total penalty for 2004 on line 35 is $6.92, the total of all amounts on lines 28, 30, 32, and 34 in all columns.
Betty enters that amount
on line 75 of her Form 1040. She also adds $7 to her $859 tax balance and enters the $866 total on line 74. She files her
return on April 15 and
includes a check for $866. Because she used the annualized income installment method, she must attach Form 2210, including
Schedule AI, to her return
and check box C of Form 2210.
If you are a farmer or fisherman, the following special rules for underpayment of estimated tax apply to you.

The penalty for underpaying your 2004 estimated tax will not apply if you file your return and pay all the tax due by March
1, 2005. If you
are a fiscal year taxpayer, the penalty will not apply if you file your return and pay the tax due by the first day of the
third month after the end
of your tax year.

Any penalty you owe for underpaying your 2004 estimated tax will be figured from one payment due date, January 15, 2005.

The underpayment penalty for 2004 is figured on the difference between the amount of 2004 withholding plus estimated tax paid
by the due
date and the smaller of:

100% of the tax shown on your 2003 return, or

66⅔% (rather than 90%) of your 2004 tax.
Even if these special rules apply to you, you will not owe the penalty if you meet either of the two conditions discussed
earlier under
Exceptions.
See chapter 2 to see whether you are a farmer or fisherman who is eligible for these special rules.
Form 2210F.
Use Form 2210F to figure any underpayment penalty. Do not attach it to your return unless you check box 1a or box
1b. Also, if neither box applies
to you and you owe a penalty, you do not need to complete Form 2210F. The IRS can figure your penalty and send you a bill.
The IRS can waive the penalty for underpayment if either of the following applies.

You did not make a payment because of a casualty, disaster, or other unusual circumstance and it would be inequitable to impose
the
penalty.

You retired (after reaching age 62) or became disabled in 2003 or 2004 and both the following requirements are met.

You had a reasonable cause for not making the payment, and

Your underpayment was not due to willful neglect.
How to request a waiver.
To request a waiver, you must complete Form 2210 as follows.

Check box A or B in Part II.

Complete line 1 through line 16 (or through line 34 if you use the regular method) without regard to the waiver.

Write the amount you want waived in parentheses on the dotted line next to line 17 (line 35 for the regular method).

Subtract this amount from the total penalty you figured without regard to the waiver. Enter the result on line 17 (line 35
for the regular
method).

Attach Form 2210 and a statement to your return explaining the reasons you were unable to meet the estimated tax requirements
and the time
period for which you are requesting a waiver.

If you are requesting a penalty waiver due to a casualty, disaster, or other circumstance, include supporting documentation,
such as police
and insurance company reports.

If you are requesting a penalty waiver due to retirement or disability, attach documentation that shows your retirement date
(and your age
on that date) or the date you became disabled.
The IRS will review the information you provide and will decide whether or not to grant your request for a waiver.
Farmers and fishermen.
To request a waiver, you must complete Form 2210F as follows.

Check box 1a in Part I.

Complete line 2 through line 19 without regard to the waiver.

Write the amount you want waived in parentheses on the dotted line next to line 20.

Subtract this amount from the total penalty you figured without regard to the waiver. Enter the result on line 20.

Attach Form 2210F and a statement to your return explaining the reasons you were unable to meet the estimated tax requirements.

If you are requesting a penalty waiver due to a casualty, disaster, or other circumstance, include supporting documentation,
such as police
and insurance company reports.

If you are requesting a penalty waiver due to retirement or disability, attach documentation that shows your retirement date
(and your age
on that date) or the date you became disabled.
The IRS will review the information you provide and will decide whether or not to grant your request for a waiver.
Form 2210 for Ivy Fields (Examples 4.4 and 4.5)Form: 2210 Filledin examples
Form 2210, page 3 (Example 4.9)
Form 2210 for Ben Brown (Example 4.6)
Form 2210 for Ivy Fields (Examples 4.4 and 4.5)Form: 2210 Filledin examples Page 2
Form 2210, page 3 (Example 4.7)Form: 2210 Filledin examples
Form 2210, page 2 (Examples 4.7 and 4.9)Form: 2210 Filledin examples
Form 2210, page 3 (Example 4.8)
Form 2210, page 3 (Example 4.9)
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