Taxpayers may qualify for a refund
For underpayment and monthly penalty
Your clients who e-filed for tax years 2002 to 2005, and were assessed an underpayment penalty (sometimes referred to as "late payment penalty"), may be receiving a refund.
Treasury Regulation Section 301.6651-1(c)(3) allows penalties to be waived when reasonable cause exists relating to any underpayment of tax. Generally, this regulation applies when:
- The tax returns are filed on extension.
- Ninety percent or more of the tax liability is paid on or before the original due date of the return.
- Any "balance due shown on the individual income tax return is remitted with the return" (emphasis added).
The Treasury Regulation is somewhat out-of-date when it comes to e-filed returns, where payment is not always remitted "with the return." With the increasing numbers of taxpayers using e-file, we have reevaluated how we determine reasonable cause, and have revised our reasonable cause policy regarding the underpayment and monthly penalties. For tax years 2002 through 2005, we will presume reasonable cause exists if all of the following conditions are met:
- The return is e-filed
- At least 90 percent of the tax due is paid by the original return due date.
- The remaining amount due is paid within 21 days after we accept the return.
We are currently reviewing accounts affected by this policy change to determine if reasonable cause exists, and to waive penalties, if appropriate. We will issue refunds from early February 2007, through June 2007.
For process years 2006 and later, we will modify the application and assessment of the late payment penalty only (Revenue and Taxation Code Section 19132) so that reasonable cause will be presumed, and this penalty will not normally be assessed if the taxpayer has paid at least 90 percent of the total tax shown on the return by the original due date. However, taxpayers should be aware that the law requires 100 percent of the tax to be paid by the original due date, and the presumption of reasonable cause for timely payment of 90 percent should not be read as a change to this requirement. Taxpayers may still be subject to the estimated tax penalty, and will be assessed underpayment interest where the full amount of tax due for the year is not paid by the original due date. This will apply to both paper and e-filed returns, for personal income tax, and business entity taxpayers.