United States General Accounting Office

GAO Report to the Chairmen and Ranking

Minority Members, Committee on

Finance, U.S. Senate, and Committee on

Ways and Means, House of

Representatives

May 1998 TAX

ADMINISTRATION

Ways to Simplify the

Estimated Tax Penalty

Calculation

GAO/GGD-98-96

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-278804 

May 27, 1998

The Honorable William V. Roth, Jr.

Chairman, Committee on Finance

United States Senate

The Honorable Daniel Patrick Moynihan

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Bill Archer

Chairman, Committee on Ways and Means

House of Representatives

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives

In 1996, about 5.9 million taxpayers were assessed almost $1.1 billion in

estimated tax (ES) penalties. The Internal Revenue Service’s (IRS) Taxpayer

Advocate’s Annual Report to Congress in 1996 described the ES penalty

rules as extraordinarily complex, and it characterized the Form 2210 used

for calculating ES penalties as one of the most difficult forms taxpayers

have to complete.

This report, which we prepared under our basic legislative responsibilities,

identifies (1) Internal Revenue Code and IRS administrative requirements

that cause some of the complexity associated with ES penalty calculations

and (2) the likely effects of corresponding changes to the requirements

that would make it easier for taxpayers to calculate their ES penalties.

Background For more than 50 years, IRS has collected estimated taxes on income not

subject to withholding, which is known as nonwage income. Nonwage

income generally includes income from pensions, interest,

self-employment, capital gains, dividends, and partnerships. In 1994, these

six categories accounted for 91 percent of all nonwage income. Nonwage

income has represented a growing proportion of total U.S. income in

recent years, increasing from 16.7 percent to 23.3 percent between 1970

and 1994. The percentage of tax returns reporting only nonwage income

has likewise increased from 10 percent to 14 percent over the same period.

Page 1 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

The ES process requires taxpayers to make four payments to IRS at regular

intervals during the tax year. At the beginning of the tax year, taxpayers

are to estimate their annual income, determine their potential tax liability,

and compute their ES payments. For tax years beginning on January 1, ES

payments are due on April 15, June 15, September 15, and January 15 of

the following year. If taxpayers underpay their ES payments, they may be

liable for ES penalties.1

Taxpayers who underpay can choose either to have IRS calculate any

penalty they owe or to self-assess their own penalty using a Form 2210.

Taxpayers using the form to self-assess their ES penalties can use either

the short or regular method to calculate their ES penalty amounts.2

 The ES

penalty equals the interest on the underpaid amount for the number of

days it is outstanding. The interest rate used to compute the penalty is

based on the federal short-term interest rate, which is subject to change

the first day of each quarter, that is, January 1, April 1, July 1, and

October 1. IRS updates the Form 2210 annually to account for changes in

the federal short-term interest rate. (See app. I for a copy of a Form 2210.)

In 1994, about 4 million taxpayers self-assessed their ES penalties. We

could not determine how many of them used the short or regular method

because IRS does not collect the data necessary to make that

determination. However, to provide a rough approximation of how many

taxpayers used the regular method, we examined 100 tax returns from the

1994 Statistics of Income database—the latest information available. The

100 returns were selected to represent taxpayers who either paid ES

penalties or were otherwise affected by the ES process. Of the 75 taxpayers

who self-assessed their ES penalties, we found that over half used the

regular method.

Results in Brief 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. We identified three requirements where the additional

1

Generally, taxpayers are not liable for ES penalties if either (1) their current year’s tax liability minus

their withholding is less than $1,000 or (2) their withholding covered at least 90 percent of their

current year’s tax liability or 100 percent of their prior year’s tax liability.

2

Only taxpayers who either made no ES payments or made four equal ES payments on time can use the

short method to compute their penalties. Taxpayers using the short method merely apply a percentage

rate shown on the Form 2210 to their ES underpayment to determine their ES penalty. Taxpayers who

use the regular method are required to make additional calculations on the Form 2210. These extra

calculations entail taxpayers calculating an underpayment for each of the four ES payment periods

and a separate ES penalty amount for each period in which there is an underpayment.

Page 2 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

calculations did not seem to be justified because they resulted in either

little or no effect on ES penalty amounts.

First, 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. We found that if taxpayers

were allowed to track the accumulated underpayment amount rather than

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.

Second, 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. If interest rates change,

this requirement increases the number of calculations taxpayers must

make but only increases or decreases the penalties by small amounts. In

1986, Congress eliminated this requirement for the 15-day period between

April 1 and April 15 by, in essence, aligning the interest rate effective date

with the ES payment date. 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.

Third, to account for leap years, taxpayers currently have to make

additional ES penalty calculations when underpayment balances extend

either through the end of a leap year or the end of a year preceding a leap

year. We 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.

Objectives, Scope,

and Methodology

Our objectives were to identify causes for the complexity in the ES penalty

process and to determine whether changes could be made to simplify the

process for taxpayers who use the regular method to calculate their ES

penalties. To achieve our objectives, we

• reviewed IRS reports on the estimated tax process;

• analyzed the instructions for preparing the Form 2210 and discussed the ES

process with IRS officials; and

• reviewed a random sample of 100 taxpayer returns subject to the ES

process to obtain a rough approximation of how many taxpayers used the

Page 3 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

regular method. The sample, which was too small to reliably project to the

universe, was extracted from IRS’ tax year 1994 Statistics of Income

database.

We did our audit work in Washington, D.C., and San Francisco between

September 1997 and March 1998 in accordance with generally accepted

government auditing standards.

We requested comments on a draft of this report from the Commissioner

of Internal Revenue. The comments we received are in appendix II and are

evaluated at the end of this letter.

Three Requirements

That Increase the

Number of

Calculations on the

Form 2210 Can Be

Changed With Little or

No Effect on Penalty

Amounts

The Form 2210 includes three requirements that complicate the ES penalty

process and result in additional calculations that need to be made by

taxpayers who use the regular method. Simplifying the underpayment

schedule, changing the effective dates of the ES penalty interest rates, and

using a 365-day year for all ES penalty calculations would make the form

easier to understand and reduce the number of ES penalty calculations

taxpayers have to make. The changes to the underpayment schedule and

the ES penalty calculations could be made administratively by IRS, while

changing the effective dates of the ES penalty interest rates would require

legislative action. These changes would have either little or no effect on ES

penalty amounts.

Tracking Individual

Underpayments Adds

Calculations to the Form

2210 That Do Not Affect

ES Penalty Amounts

The Form 2210 underpayment schedule is used to determine taxpayers’

underpayments in each of the four ES payment periods. The underpayment

calculation first requires taxpayers to apportion the required annual

payment amount—the amount of taxes that should have been paid during

the year—to each of the four ES payment periods.3

 The apportioned

amounts are the required ES installments—the taxes that should have been

paid in each of the ES payment periods.

Conceptually, the basis for the underpayment calculation is relatively

straightforward. To determine the underpayment amount, taxpayers

essentially compare the ES installment with the ES payments made and any

withholding during the payment period. When the installment amount is

greater than the combined amounts of ES payments and withholding,

taxpayers have an underpayment and are liable for ES penalties.

3

The required annual payment is allocated either (1) equally to the four ES payment periods, if the

taxpayer’s income was earned evenly throughout the year or (2) unequally in accordance with the

proportion of the taxpayer’s income that was earned in each of the ES payment periods.

Page 4 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

However, in actual practice, taxpayers must follow a more complicated

procedure to calculate their underpayments. 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 definition precludes

existing underpayment balances from being used in underpayment

calculations for succeeding ES payment periods. To illustrate the

complexity of this procedure, a completed Form 2210 for a hypothetical

taxpayer is shown in figure III.1 in appendix III.

The underpayment schedule would be simplified by changing the form so

as to allow taxpayers to carry forward underpayment balances to

succeeding ES payment periods. To calculate their underpayments using

this simplified approach, taxpayers would subtract the combined amount

of their ES payment and withholding from the total of their current ES

installment and their underpayment balance from the previous payment

period. This change would reduce the number of calculations taxpayers

have to make on the underpayment schedule but would, in some cases,

make the computed underpayment amounts different. Figure III.2 in

appendix III shows our revised underpayment schedule for a hypothetical

taxpayer.

To avoid a difference in the ES penalty amounts calculated using the

different underpayment amounts, a corresponding change to the ES

penalty underpayment period would be needed. The change would further

simplify the process for taxpayers by eliminating additional ES penalty

calculations, while ensuring that ES penalty amounts are not affected.

Appendix IV shows a comparison of ES penalty calculations required under

the current and simplified approaches.

Although simplifying the Form 2210 underpayment schedule and changing

the underpayment period in the ES penalty calculation schedule would

reduce the number of calculations taxpayers need to make, it would

require that taxpayers and tax preparers adjust to a revised Form 2210,

which has not changed since 1986. However, we believe the recurring

advantages of simplifying the form outweigh this one-time adjustment.

Page 5 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

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). The interest rate used

in the calculation is based on the federal short-term interest rate, which is

subject to change on the first day of each quarter.

Under the current approach, if interest rates change while an

underpayment is outstanding, taxpayers are required to make separate

calculations for the periods before and after the interest rate change.

Typically, in such instances, the separate calculations are necessary to

cover only 15-day periods because the applicable ES payment dates occur

either 15 days immediately before or after the effective dates of interest

rate changes. For example, the July 1 interest rate change occurs 15 days

after the June 15 payment date.

This use of different dates for ES payment dates and interest rate effective

dates has the effect of increasing the number of penalty calculations

taxpayers must make. Table 1 illustrates the calculations that would have

to be made by a hypothetical taxpayer with underpayments in three ES

payment periods. To compute the ES penalty for the June 15

underpayment, the taxpayer would need to make two calculations,

numbers 1 and 2, because the April 1 interest rate was in effect during the

first period the underpayment was outstanding and the July 1 interest rate

was in effect for the second period the underpayment was outstanding.

Similarly, three calculations, numbers 3, 4, and 5 would be necessary to

compute the taxpayer’s ES penalty for the September 15 underpayment

because three different interest rates were in effect during the period the

underpayment was outstanding.

Page 6 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

Table 1: Calculations Necessary to

Compute an ES Penalty for a

Hypothetical Taxpayer

Calculation

number and

underpayment

date

Interest rate

effective date

Date

underpayment

balance paid

Period covered by

calculation

1. June 15 April 1 September 15 June 16-June 30

2. June 15 July 1 September 15 July 1-September 15

3. September 15 July 1 January 15 September 16-September 30

4. September 15 October 1 January 15 October 1-December 31

5. September 15 January 1 January 15 January 1-January 15

6. January 15 January 1 April 15 January 16-April 15

Source: GAO analysis of IRS Publication 505, Tax Withholding and Estimated Tax.

Unlike the ES penalty calculations previously discussed, penalty

calculation number 6 is different. For that penalty, only one calculation at

the January 1 interest rate would be required for the entire period the

underpayment was outstanding because of a special rule in section

6621(b)(2)(B) of the Internal Revenue Code. The special rule, in essence,

changes the effective date of the April 1 interest rate change to April 15,

thereby allowing IRS to use the January 1 interest rate for the 15-day period

between April 1 and April 15.4

Expansion of the special rule to cover all ES payment dates and interest

rate dates would reduce the number of calculations taxpayers would have

to make. 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. Instead, taxpayers would make only one calculation at the

interest rate, which becomes effective at the end of the affected 15-day

period. To illustrate the effect of the change, we used the hypothetical

taxpayer case shown in table 1. Under an expanded special rule, the

taxpayer would be required to make only three calculations rather than

six, as shown in table 2.

4

The special rule was implemented to facilitate the Form 2210 update process, which concludes in

December. To have the Form 2210 available to taxpayers in January, IRS must use the January 1

interest rate because the interest rate for the April 1-April 15 period is not known in December.

Page 7 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

Table 2: Calculations Necessary to

Compute an ES Penalty If the Special

Rule Were Expanded

Calculation number

and underpayment

date

Interest rate

effective date

Date

underpayment

balance paid

Period covered by

calculation

1. June 15 July 1 September 15 June 16-September 15

5. September 15 October 1 January 15 September 16-January

15

6. January 15 January 1 April 15 January 16-April 15

Source: GAO analysis of revised changes and IRS Publication 505.

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. For example, if the

interest rates increased on July 1, the rate used to calculate ES penalties

for June 15 underpayments would be the higher July 1 rate rather than the

lower rate effective before July 1. Conversely, if the interest rates

decreased on July 1, ES penalties would be based on the lower July 1 rate.

Expressed in terms of the ES underpayment, a 1-percent change for the

15-day period increases or decreases an ES penalty by 0.04 percent of the

underpayment amount, or $4.11 on a $10,000 underpayment.5

We analyzed the effect of expanding the special rule on actual ES penalty

amounts for 32 taxpayers in our sample of 100 taxpayers subject to the ES

process who used the regular method in 1994 and who had submitted

Form 2210s with their tax returns. A comparison of the ES penalty amounts

computed using the expanded special rule with the actual ES penalties

showed that changes were relatively small. In 15 cases, the ES penalties did

not change. In the 17 other cases, the changes ranged from an increase of

$1 on a $49 penalty to an increase of $163 on a $8,573 penalty. In 24 cases,

the use of the expanded rule reduced the number of penalty calculations

taxpayers needed to make. In 1 case, the number of penalty calculations

declined from 11 to 4. (See app. VI for more details on the comparison and

the ES penalty calculation schedules required on the current and revised

Form 2210 for a sample case.)

The comparison reflects 1994 interest rates, which increased from 7 to

9 percent during the year. If interest rates had decreased, the ES penalty

amounts would have similarly decreased. Over the 10-year period 1987

through 1996, changes in the interest rate used to compute ES penalties

5

In the past 10 years, interest rates used to compute ES penalty amounts have increased by 1 percent 8

times and decreased by 1 percent 8 times. This pattern would tend to equalize this change’s effect on

ES penalty amounts. Appendix V shows the changes and when they occurred.

Page 8 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

varied, increasing in 2 years, decreasing in 2 years, both increasing and

decreasing in 4 years, and not changing in 2 years. (See app. V for a

summary of interest rate changes over the 10-year period.)

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. For example, if a taxpayer has an underpayment on September

15 that extends through January 15, the taxpayer would have to make two

calculations to compute the ES penalty. For the first calculation, which

would cover the period September 15 through December 31, the taxpayer

would need to use a 366-day year in the formula. For the second

calculation, which would cover the period January 1 through January 15,

the taxpayer would need to use a 365-day year in the formula. In years

preceding a leap year, taxpayers would have to use a similar calculation

method to account for the change from a 365- to a 366-day year.

The current process could be simplified by allowing taxpayers to use a

365-day year for all ES penalty calculations, regardless of the year. If there

were no interest rate change on January 1, this change would eliminate an

extra calculation for taxpayers with outstanding underpayment balances

extending either through the end of a leap year or the end of a year

preceding a leap year.

This change would increase ES penalty amounts by 0.3 percent during the

period affected.6

 For example, the ES penalty computed using the current

method would be $2,557 on a $40,000 underpayment outstanding for 260

days at 9 percent. Using a 365-day year in the same calculation results in

an ES penalty of $2,564. The dollar amount of the increase would vary

depending on the underpayment amount and how long it was outstanding.

One-Time Adjustment to

the ES Penalty Calculation

Process Would Provide

Recurring Benefits

Modifying the ES penalty calculation would require taxpayers and tax

preparers to adjust to a revised Form 2210, which has not been changed

since 1986. Making the adjustment would not be difficult because it would

occur one time and would affect only the calculation of the ES penalty. The

rules governing application of the ES penalty process would not be

6

The maximum number of days affected by this change would be 260 days in a leap year (April 15

through December 31). In a year preceding a leap year, 106 days would be affected by this change

(January 1 through April 15). The ES penalty formula would use a 365-day year rather than a 366-day

year during these periods if the change were made.

Page 9 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

affected by the change. The effect on IRS would also be minimal, since they

currently revise the Form 2210 annually to account for interest rate

changes.

The benefits of modifying the ES penalty calculation process would be

recurring for taxpayers who use the regular method. Revising the

underpayment schedule would make it easier to understand and would

reduce the number of calculations taxpayers have to make on the

schedule. Similarly, adjusting the effective dates for interest rates used to

compute ES penalties and using a 365-day year to calculate all ES penalties

could further reduce the number of calculations taxpayers would have to

make.

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.

Administrative changes and legislative action would be needed to reduce

the number of calculations required on the Form 2210 and make it easier

for taxpayers to complete. Although the changes would require taxpayers

and tax preparers to adjust to using a new form, we believe the recurring

advantages of the change would outweigh that one-time adjustment.

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.

Recommendation to

Congress

To further simplify the ES penalty process for taxpayers, we recommend

that Congress amend section 6621(b)(2)(B) of the Internal Revenue Code

to include the periods June 15 through June 30, September 15 through

September 30, and January 1 through January 15.

Page 10 GAO/GGD-98-96 Estimated Tax Penalty Calculation
B-278804 

Agency Comments

and Our Evaluation

We obtained written comments on a draft of this report from the

Commissioner of Internal Revenue (see app. II). The Commissioner said

that he generally agreed with all of our recommendations.

The Commissioner commented, however, that IRS would not consider

revising the Form 2210 underpayment schedule before legislative action is

taken to amend section 6621(b)(2)(B) and expand the ES special rule to the

new periods. IRS believes that expanding the special rule would provide

the greatest relief to taxpayers and that revising the Form 2210 without

incorporating that change would not be justified by the lesser benefits

derived from revising the underpayment schedule.

We concur with IRS’ position and believe that all changes should be made

at the same time to minimize the adjustment required by taxpayers and tax

preparers to the revised Form 2210.

We are sending copies of this report to the Secretary of the Treasury,

Commissioner of Internal Revenue, and other interested parties. We will

make copies available to others upon request.

The major contributors to this report are listed in appendix VII. If you have

any questions, please contact me on (202) 512-9110.

James R. White

Associate Director, Tax Policy and

 Administration Issues

Page 11 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Contents

Letter 1

Appendix I 

IRS Form 2210

16

Appendix II 

Comments From the

Internal Revenue

Service

18

Appendix III 

Comparison of a

Current Form 2210

Underpayment

Schedule to a Revised

Underpayment

Schedule

19

Appendix IV 

Comparison of ES

Penalty Calculations

Using the Current and

Revised Instructions

22

Appendix V 

Summary of Changes

in the Interest Rate

Used to Compute ES

Penalties for the

Period 1987 Through

1996

25

Page 12 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Contents

Appendix VI 

Analysis of How

Expanding the ES

Special Rule Affected

the ES Penalties

Computed for a

Random Sample of 32

Taxpayers

26

Appendix VII 

Major Contributors to

This Report

29

Tables Table 1: Calculations Necessary to Compute an ES Penalty for a

Hypothetical Taxpayer

7

Table 2: Calculations Necessary to Compute an ES Penalty If the

Special Rule Were Expanded

8

Table IV.1: Calculations Necessary Using Current ES Penalty

Instructions

22

Table IV.2: Calculations Necessary Using ES Penalty Instructions

Revised in Accordance With Simplifications Made to the Form

2210’s Underpayment Schedule

23

Table VI.1: Comparison of ES Penalty Amounts Computed for 32

Sampled Taxpayers Using the Current Form 2210 and the

Expanded Special Rule

26

 Table VI.2: ES Penalty Calculations Required for Sample Number

13 Using the Current Form 2210

27

 Table VI.3: ES Penalty Calculations Required for Sample Number

13 on the Revised Form 2210

28

Figures Figure I.1: IRS Form 2210, Schedule to Compute Required Annual

Payment and ES Penalty Using the Short Method

16

Figure I.2: IRS Form 2210, Schedule to Compute Underpayments

and ES Penalty

17

Figure III.1: Steps Required on the Current Form 2210

Underpayment Schedule

20

Page 13 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Contents

Figure III.2: Steps Required on Our Revised Form 2210

Underpayment Schedule

21

Abbreviations

ES estimated tax

IRS Internal Revenue Service

Page 14 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Page 15 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix I 

IRS Form 2210

Figure I.1: IRS Form 2210, Schedule to Compute Required Annual Payment and ES Penalty Using the Short Method

Page 16 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix I 

IRS Form 2210

Figure I.2: IRS Form 2210, Schedule to Compute Underpayments and ES Penalty

Page 17 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix II 

Comments From the Internal Revenue

Service

Page 18 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix III 

Comparison of a Current Form 2210

Underpayment Schedule to a Revised

Underpayment Schedule

In figures III.1 and III.2, we compare section A, lines 21-29, of the current

Form 2210 Underpayment Schedule with our revised section A for a

hypothetical taxpayer. The hypothetical taxpayer had underpayments of

$5,000 in each ES payment period, and made ES payments of $3,000 on

April 15, $1,000 on June 15, $2,000 on July 30, $4,500 on September 15, and

$9,500 on January 15.

Page 19 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix III 

Comparison of a Current Form 2210

Underpayment Schedule to a Revised

Underpayment Schedule

Figure III.1: Steps Required on the Current Form 2210 Underpayment Schedule

Source: GAO analysis of IRS Publication 505.

Page 20 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix III 

Comparison of a Current Form 2210

Underpayment Schedule to a Revised

Underpayment Schedule

Figure III.2: Steps Required on Our Revised Form 2210 Underpayment Schedule

Source: GAO analysis of IRS Publication 505.

Page 21 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix IV 

Comparison of ES Penalty Calculations

Using the Current and Revised Instructions

In tables IV.1 and IV.2, we compare the ES penalty calculations necessary

using the instructions on the current Form 2210 with the ES penalty

calculations necessary if the instructions for the calculations were revised

in accordance with the revisions made to simplify the form’s

underpayment schedule.

Table IV.1: Calculations Necessary Using Current ES Penalty Instructions

Underpayment amount $2,000 $5,000 $4,500

ES payment period Apr. 15 - June 30 July 1 - Sept. 30 Oct. 1 - Jan. 15

Calculation number 12345678

Amount used in

calculation (payment or

residual underpayment)

$1,000 $1,000 $1,000 $5,000 $1,000 $4,000 $4,500 $4,500

Reason for

calculation—payment (P)

or interest rate change (I)

P I P I P P I P

Period covered by the

calculation

4/15-

6/15

4/15-

6/30

7/1-

7/30

6/15-

6/30

7/1-

7/30

7/1-

9/15

9/16-

9/30

10/1-

1/15

Number of days covered

by the calculation

61 76 30 15 30 77 15 107

Interest rate .07 .07 .08 .07 .08 .08 .08 .09

Penalty

Total penalty = $257

(diff. due to rounding)

$12 $15 $7 $14 $7 $68 $15 $119

Source: GAO analysis of IRS Publication 505.

Eight calculations are necessary under the current instructions to

determine the total ES penalty. Three calculations for the $2,000

underpayment are needed to account for (1) the $1,000 payment on June

15, (2) the interest rate change on July 1, and (3) the $2,000 payment on

July 30. Three calculations for the $5,000 underpayment are needed to

account for (1) the interest rate change on July 1, (2) the $1,000 payment

on July 30, and (3) the $4,500 payment on September 15. Two calculations

for the $4,500 underpayment are needed to account for (1) the interest rate

change on October 1, and (2) the $9,500 payment on January 15.

Page 22 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix IV 

Comparison of ES Penalty Calculations

Using the Current and Revised Instructions

Table IV.2: Calculations Necessary Using ES Penalty Instructions Revised in Accordance With Simplifications Made to the

Form 2210’s Underpayment Schedule

Underpayment amount $2,000 $6,000 $4,500

ES payment period

Apr. 15 - June

15 June 16 - Sept. 15 Oct. 1 - Jan. 15

Calculation number 123456

Amount used in

calculation

(underpayment or

residual underpayment)

$2,000 $6,000 $6,000 $4,000 $4,500 $4,500

Reason for

calculation—payment/

end of ES period

(P) or interest change (I)

P I P P I P

Period covered by the

calculation

4/15-

6/15

6/15-

6/30

7/1-

7/30

8/1-

9/15

9/16-

9/30

10/1-

1/15

Number of days covered

by the calculation

61 15 30 47 15 107

Interest rate .07 .07 .08 .08 .08 .09

Penalty

Total penalty = $254

(diff. due to rounding)

$23 $17 $39 $41 $15 $119

Source: GAO analysis of IRS Publication 505.

The revised instructions affect underpayments outstanding through more

than one ES payment period, and the difference involves the period used to

calculate the ES penalty. The difference is illustrated in tables IV.1 and IV.2

by the calculations used to compute the ES penalty for the $2,000

underpayment. In table IV.1, the $2,000 underpayment is outstanding from

April 15, the ES payment due date, to July 30, when the underpayment

balance was paid. Under the revised instructions, the underpayment is

outstanding from April 15 to June 15, the next ES payment due date.

Under the revised instructions, there is a $1,000 underpayment balance

outstanding on June 15 that is not paid until July 30. This $1,000 balance is

accounted for by carrying it forward to the next ES payment period, as

shown in appendix III. In figure III.2, the underpayment for June 15 is

$6,000, while the underpayment for the same period in figure III.1 is

$5,000. As a result, the ES penalty for the $1,000 balance is included in the

ES penalty calculated for the $6,000 underpayment, shown in table IV.2.

Page 23 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix IV 

Comparison of ES Penalty Calculations

Using the Current and Revised Instructions

The number of calculations necessary for the June 15 and September 15

underpayments are the same under both methods because the

underpayments are not outstanding through more than one ES payment

period. However, calculation numbers 2 and 5 in table IV.2 could be

eliminated by expanding the ES special rule (see pp. 6-9).

Page 24 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix V 

Summary of Changes in the Interest Rate

Used to Compute ES Penalties for the

Period 1987 Through 1996

Change in Interest Rate and New Interest Rate Number of changes

Year Apr. 1 July 1 Oct. 1 Jan. 1 Increases Decreases

1987 +1(10%) +1(11%) 2 0

1988 –1(10%) +1(11%) 1 1

1989 +1(12%) –1(11%) 1 1

1990 0 0

1991 –1(10%) –1(9%) 0 2

1992 –1(8%) –1(7%) 0 2

1993 0 0

1994 +1(8%) +1(9%) 2 0

1995 +1(10%) –1(9%) 1 1

1996 –1(8%) +1(9%) 1 1

Total increases 2 2 3 1 8

Total

decreases 4 1 2 1 8

Total 

changes 6 3 5 2 16

Source: GAO analysis of Form 2210s from 1987 through 1996.

Page 25 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix VI 

Analysis of How Expanding the ES Special

Rule Affected the ES Penalties Computed

for a Random Sample of 32 Taxpayers

In table VI.1, we compare the ES penalty amounts computed for 32

sampled taxpayers using the current Form 2210 and the penalties

computed using the expanded special rule. In tables VI.2 and VI.3, we

compare the ES penalty schedule required on the current Form 2210 and

on the revised Form 2210 for sample case number 13.

Table VI.1: Comparison of ES Penalty Amounts Computed for 32 Sampled Taxpayers Using the Current Form 2210 and the

Expanded Special Rule

Penalty calculations Difference Calculations required by taxpayer

Case number Form 2210

Using expanded

special rule Amount

Percent of Form

2210 amount Form 2210

Using expanded

special rule

1 $8,573 $8,736 $163 1.9 6 3

2 5,098 5,188 90 1.8 6 3

3 6,801 6,886 85 1.3 8 4

4 1,779 1,816 37 2.1 2 1

5 1,668 1,695 27 1.6 3 2

6 770 791 21 2.7 6 3

7 1,207 1,225 18 1.5 5 3

8 1,447 1,462 15 1.1 6 4

9 822 835 13 1.6 3 2

10 1,270 1,282 12 0.1 8 4

11 765 772 7 0.1 6 4

12 233 237 4 1.8 2 1

13 251 254 3 1.4 11 4a

14 100 102 2 2.3 9 4

15 168 170 2 1.1 5 3

16 188 189 1 0.7 6 4

17 49 50 1 1.6 3 2

18 3 3 0 0 2 1

19 61 61 0 0 4 4

20 45 45 0 0 5 3

21 11 11 0 0 4 2

22 2 2 0 0 1 1

23 1 1 0 0 1 1

24 2 2 0 0 1 1

25 757 757 0 0 1 1

26 19 19 0 0 2 1

27 44 44 0 0 2 2

28 82 82 0 0 1 1

29 3 3 0 0 2 1

(continued)

Page 26 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix VI 

Analysis of How Expanding the ES Special

Rule Affected the ES Penalties Computed

for a Random Sample of 32 Taxpayers

Penalty calculations Difference Calculations required by taxpayer

Case number Form 2210

Using expanded

special rule Amount

Percent of Form

2210 amount Form 2210

Using expanded

special rule

30 3 3 0 0 2 1

31 43 43 0 0 6 4

32 1 1 0 0 3 3

aSee tables VI.2 and VI.3 for a comparison of the ES penalty calculations required on the current

Form 2210 and the revised Form 2210 for this sampled case.

Source: GAO analysis of selected tax returns and GAO ES penalty computations using the

simplified underpayment schedule and revised interest rate effective dates.

Table VI.2: ES Penalty Calculations Required for Sample Number 13 Using the Current Form 2210

(a) 4/15/94 (b) 6/15/94 (c) (d)

April 16, 1994 - June 30, 1994

30. Number of days FROM the date shown

above line 30 TO the date the amount on line

28 was paid or 6/30/94, whichever is sooner. 30

Days:

61

Days:

15

15

31. Underpayment Number of days

on line 28 X days on line 30 X.07

365 31

$13 $5

$1

6/30/94 6/30/94 9/15/94

July 1, 1994 - September 30, 1994

32. Number of days FROM the date shown

above line 30 TO the date the amount on line

28 was paid or 6/30/94, whichever is sooner. 32

Days: Days:

77

92

Days:

15

15

33. Underpayment Number of days

on line 28 X days on line 32 X.08

365 33

$31

$7

$5

$5

9/30/94 9/30/94 9/30/94 1/15/95

October 1, 1994 - April 15, 1995

34. Number of days FROM the date shown

above line 30 TO the date the amount on line

28 was paid or 6/30/94, whichever is sooner. 34

Days: Days:

107

Days:

107

197

Days:

90

35. Underpayment Number of days

on line 28 X days on line 34 X.09

365 35

$9 $39

$71

$65

36. Penalty: Add all amounts on lines 31, 33,

and 35 in all columns. Enter the total here and

on Form 1040, line 65; Form 1040A, line 33;

Form 1040NR, line 66; or Form 1041, line 26

36 $251

Source: GAO analysis of IRS Publication 505, Tax Withholding and Estimated Tax.

Page 27 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix VI 

Analysis of How Expanding the ES Special

Rule Affected the ES Penalties Computed

for a Random Sample of 32 Taxpayers

On the current Form 2210, 11 calculations (results in bold) were necessary

to compute the total ES penalty because the underpayments in columns (b)

and (c) were outstanding through January 15 and April 15, respectively,

and interest rates changed twice during that period.

Table VI.3: ES Penalty Calculations Required for Sample Number 13 on the Revised Form 2210

(a) 4/15/94 (b) 6/15/94 (c) 9/15/94 (d) 1/15/95

29. Number of days FROM the date shown

above line 29 TO the date the amount on line

27 was paid or the next ES payment date. 29

Days:

61

Days:

92

Days:

122

Days:

90

30. Interest rate 30 .07 .08 .09 .09

31. Underpayment Days on Interest

on line 27 X line 29 X Rate on 365 line 30 31

$13 $44 $99 $98

32. Penalty: Add all amounts on lines 31 in all

columns. Enter the total here and on Form

1040, line 65; Form 1040A, line 33; Form

1040NR, line 66; or Form 1041, line 26

32 $254

On the revised Form 2210, only four calculations would be necessary to

compute the ES penalty because rather than tracking each underpayment

until it is paid, the ES penalty is calculated for the underpayment at the end

of each ES payment period. Any remaining underpayment balance is

carried forward, and the ES penalty for the accumulated balance would be

calculated at the end of the next ES payment period.

Page 28 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Appendix VII 

Major Contributors to This Report

San Francisco Field

Office

Ralph Block, Assistant Director

John Zugar, Senior Evaluator

Susan Mak, Evaluator

Gerhard Brostrom, Communications Analyst

(268822) Page 29 GAO/GGD-98-96 Estimated Tax Penalty Calculation
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100