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Tax News Erroneous Underpayment Penalties Issued

For taxable years beginning January 1, 2009, California requires individual taxpayers with California AGI equal to or greater than $1,000,000 ($500,000 for married/RDP filing separately) to pay 90 percent of the current year tax or be subject to the underpayment of estimated tax penalty. FTB 5805, Underpayment of Estimated Tax by Individuals and Fiduciaries, provides the following instructions:

If you meet any of the following conditions, you do not owe a penalty for underpayment of estimated tax. Do not complete or file this form if:

  • The amount of your tax liability (not including tax on lump-sum distributions) less credits (including the withholding credit) but not including estimated tax payments for either 2008 or 2009 was less than $500 (or less than $250 if married/RDP filing a separate return).
  • Your 2008 return was for a full 12 months (or would have been if you were required to file) and you did not have any tax liability on that return.
  • The amount of your withholding plus your estimated tax payments, if paid in the required installments, is at least 90 percent of the tax shown on your 2009 return or 100 percent of the tax shown on your 2008 return (110 percent if AGI was more than $150,000 or $75,000 if married/RDP filing a separate return) and you are not using the annualized income installment method. Taxpayers with AGI equal to or greater than $1,000,000 (or $500,000 if married/RDP filing a separate return), must use the tax shown on their 2009 tax return.

Unfortunately, our systems did not allow the $500/$250 tax liability prior year exception for a 2009 tax year return reporting an AGI equal to or greater than $1,000,000 ($500,000 for married/RDP filing separately). As a result, notices with incorrect penalties were sent out. We corrected this processing error so that returns processed after June 29, 2010, will be allowed the prior year exception as stated above. We have identified the affected 2009 tax returns and corrected accounts on July 20, 2010. FTB 719PC, Underpayment of Estimate Tax Penalty, will be sent to taxpayers regarding the adjustment beginning July 26, 2010. If applicable, refunds will be mailed within two weeks.

For questions on the underpayment of estimated tax penalty, contact our practitioner hotline staff at 916.845.7057 or have your clients contact the taxpayer services center section at 1.800.852.5711. We apologize for any inconvenience this may have caused you and your clients.

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