This procedure entails additional calculations to account for underpayment balances that may remain from previous payment periods. These additional calculations are necessary to comply with the definition of the term “underpayment” in section 6654(b)(1) of the Internal Revenue Code. The 15-Day Periods Between ES Interest Rate Dates and ES Payment Dates Increase the Number of Calculations Taxpayers Have to Make

To determine their ES penalties, taxpayers must calculate the interest on the underpayment amount for the number of days it was outstanding, that is, the number of days between when the taxpayer should have made the ES payment and the earlier of (1) when the payment was actually made, or (2) the 15th day of the 4th month following the close of the taxable year (April 15 for a taxpayer using a calendar-year basis). Specifically, aligning the July 1, October 1, and January 1 interest rate effective dates with the June 15, September 15, and January 15 ES payment dates, respectively, would eliminate the 15-day ES penalty calculations. Expanding the special rule would have little effect on ES penalty amounts, either increasing or decreasing them for the affected 15-day periods, depending on the direction of the interest rate change. The Requirement to Adjust the ES Penalty Formula for Leap Year Related Changes Increases the Number of Calculations Taxpayers Have to Make

Under current IRS procedures, taxpayers who have outstanding underpayment balances that extend through the end of a leap year must make separate calculations to account for the change from a 366- to a 365-day year regardless of whether there is an interest rate change on January 1. This change would increase ES penalty amounts by 0.3 percent during the period affected. Conclusions

To help ensure compliance with the Internal Revenue Code and IRS administrative requirements, the Form 2210 requires taxpayers to perform numerous calculations to track individual underpayment amounts and to determine precise ES penalty amounts. In three instances, the additional calculations did not seem to be justified because they resulted in either little or no change in penalty amounts. Recommendations to the Commissioner of Internal Revenue

To simplify the ES penalty process for taxpayers, we recommend that the Commissioner of Internal Revenue revise the Form 2210 underpayment schedule to allow taxpayers to track the accumulated underpayment amount rather than individual underpayment amounts and revise the Form 2210 ES penalty calculation schedule to allow taxpayers to use a 365-day year in all ES penalty calculations. 6-9). Additional copies are $2 each.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the: (1) Internal Revenue Code and the Internal Revenue Service (IRS) administrative requirements that cause some of the complexity associated with estimated tax (ES) penalty calculations; and (2) likely effects of corresponding changes to the requirements that would make it easier for taxpayers to calculate their ES penalties.

What GAO Found

GAO noted that: (1) to help ensure compliance with the Internal Revenue Code and IRS administrative requirements, form 2210 requires numerous calculations to track individual ES underpayments and to determine precise ES penalty amounts; (2) GAO identified three requirements where the additional calculations did not seem to be justified because they resulted in either little or no effect on ES penalty amounts; (3) the form 2210 underpayment schedule, which currently requires that taxpayers track each underpayment individually, results in a complicated procedure, involving numerous calculations, to comply with the definition of underpayment in the Code; (4) GAO found that if taxpayers were allowed to track the accumulated underpayment amounts rather than if individual amounts and if a corresponding change were made to the ES penalty underpayment period, taxpayers could reduce the number of calculations without affecting ES penalty amounts; (5) taxpayers currently have to make additional ES penalty calculations to account for three of the four 15-day periods between ES interest rate effective dates and ES payment dates; (6) if interest rates change, this requirement increases the number of calculations taxpayers must make but only increases or decreases the penalties by small amounts; (7) in 1986, Congress eliminated this requirement for the 15-day period between April 1 and April 15 by aligning the interest rate effective date with the ES payment date; (8) similar alignments for the other three 15-day periods during the year would eliminate the calculations taxpayers must make for the 15-day periods and have little effect on ES penalty amounts; (9) to account for leap years, taxpayers currently have to make additional ES penalty calculations when underpayment balances extend either through the end of the leap year or the end of the year preceding a leap year; and (10) GAO found that, if taxpayers were allowed to use a 365-day year in all ES penalty calculations, they could eliminate the additional calculations and the penalties for the periods affected would increase by a very small amount--only 0.3 percent.