Timely estimated tax payments can be based on late-filed returns.

• Author: O'Driscoll, David

The IRS will not impose an addition to tax under Sec. 6654(a) on an individual whose timely estimated tax payments for the current tax year are based on the tax shown on a late-filed return for the preceding tax year.

An individual who underpays estimated tax is subject to an addition to tax trader Sec. 6654(a). Under 6654(b)(1), an underpayment is the excess of the required installment over the amount of the installment paid on or before the installment due date. Sec. 6654(c)(1) requires four installments for each tax year.

In general, the amount of any required installment is 25% of the required annual payment. Under Sec. 6654(d)(1)(B)(i) and (ii), the required annual payment is the lesser of (1) 90% of the tax shown on the return for the tax year (or, if no return is filed, 90% of the tax for such year); or (2) 100% of the tax shown on the individual's return for the preceding tax year. If the adjusted gross income shown on the preceding-year's return exceeds $150,000, the required annual payment is 110% of the tax shown on such return. If the preceding tax year was less than 12 months, or if the individual did not file a return for the preceding tax year, the required annual payment is 90% of the tax shown on the current-year return.

Under Regs. Sec. 1.6654-2(a)(1), the Sec. 6654 addition to tax will not be...