Q: I have a procedural question about refunds and estimated taxes. I filed my 2013 tax return on extension in May. I was forced to extend because I was waiting for a K-1 form from an S corporation that I own stock in. My final tax liability for 2013 was $17,554 and I made tax payments of $24,000 ($6,000 for each quarter, and they were each paid on time). So when I filed my 2013 return in May, it showed a refund of $6,446. I was advised that estimated payments for 2014 would be $4,500 per quarter since they would be based on 2013 taxes. I applied my tax refund to estimated taxes. So I owed nothing for the first quarter ($4,500 was less than the refund), $2,554 for the second quarter (after using the refund), and then $4,500 for the third and fourth quarters. Seems very straightforward. But when my 2014 return was prepared, it showed that I owed a penalty for the year for underpaying my estimated taxes. This was explained to me as I had not paid my first quarter by April 15, 2014. I more than paid my first quarter because IRS had my $6,446 for the entire early part of 2014. I paid the penalty, but want to know if I have recourse to get it back.
No you do not. You are correct in stating that the IRS had your excess payment for 2013 when the first-quarter 2014 payment was due. But you had not filed your 2013 return at that time and had not informed IRS how you wanted to dispose of the refund.
You could have requested a refund when you filed your 2013 return in May 2014. Had you done that, you would clearly have been underpaid for the first-quarter estimated payment. Until you file the return and inform IRS how you want the refund used, you have not made an estimated payment.
So you were underpaid for the first quarter of 2014. By the due date of the second quarter, you had corrected that underpayment with the combination of the estimated payment and the application of the refund to your estimated taxes.
I often advise clients in your situation to use withholdings to “cure” the first-quarter underpayment. Withholdings can be made in a variety of ways, but they are assumed to be spread evenly throughout the year regardless of when actually made.
Of course, if you had filed the return by April 15, the refund would have been timely applied to the first-quarter payment. I realize you were forced to extend the return but, if you have to extend in the future, you may want to consider an alternate way to take care of the first-quarter payment.
Q: If a tax return is filed in March claiming a $5,500 IRA contribution and the plan was to actually make the contribution by April 15, but I forgot to actually make the contribution, what should I do now? Is it possible to use an extended date for the contribution?
There is no extended date available for a regular IRA contribution. If the contribution is to a simplified employee pension, which is similar to an IRA, the due date for the contribution can be extended if the owner of the business (often a proprietor) extends his or her return.
At this point, you will need to file an amended tax return for both federal and New Mexico. The amended return uses Form 1040X (federal) and PIT-X (state). The form has a section to explain why you are amending.
The removal of the IRA deduction obviously means you will owe additional taxes. You will also be charged interest and, very likely, penalties (federal considers claiming an IRA deduction that was not made to be an automatic negligence penalty).
Let the IRS and New Mexico worry about computing interest and perhaps penalties. If you get a penalty assessment, you can try to have the penalty abated for reasonable cause.
“I forgot” would not justify a reasonable cause exception to a penalty. So, if that’s your best explanation, wait and just hope they assess only interest on the additional tax.