


Ask the community...
Here's a tip that many people don't know about: if this is your first time with an underpayment situation, you can often get the IRS to waive the penalty through what's called "First Time Penalty Abatement." You have to specifically ask for it though! I was in your exact situation 2 years ago with my side business. I called the IRS after I got the penalty notice (took forever to get through) and just politely explained that I didn't understand the quarterly payment requirements and asked if there was any relief available since I had always filed and paid on time before. They removed the entire penalty!
Do you have to wait until they assess the penalty before requesting abatement? Or can you be proactive and request it when you file?
You generally need to wait until they assess the penalty before requesting abatement. The IRS typically sends a separate notice about penalties after processing your return. When you get that notice, that's when you should call and request the First Time Penalty Abatement. You can't really request it proactively when filing because the IRS needs to calculate the penalty first. The good news is that if you qualify, they'll usually grant it without much hassle as long as you've had a clean compliance record for the previous 3 years.
Watch out for state taxes too! Everyone here is talking about federal, but depending on your state, you might owe there as well. I forgot about state taxes on my DoorDash income and got hit with penalties from both IRS and my state tax board.
This is such a good point. I'm in California and their underpayment penalties are actually worse than the federal ones. Had to pay almost 9% penalty on what I owed to the state.
My accountant told me something different about this situation. She said that if you over-contribute to a Roth IRA, you could also recharacterize the excess amount to a Traditional IRA instead of paying the penalty, as long as you're eligible to contribute to a Traditional IRA. Has anyone done this? Not sure if this would still be an option for contributions from 2019 though.
Your accountant is partly right, but timing is crucial. Recharacterization was an option before the tax filing deadline (including extensions) for the year of the contribution. For 2019 contributions, that deadline would have been around July-October 2020 (extended due to COVID). Since we're in 2025 now, recharacterization is no longer an option for 2019 contributions. The OP will need to go with the Form 5329 and penalty approach. But your suggestion is definitely good advice for anyone who catches their over-contribution more quickly!
When I had a similar Roth over-contribution problem, I was told by an IRS representative that I should also consider the earnings on the excess amount. The 6% penalty applies to the excess contribution itself, but what about the earnings that excess generated? If you eventually remove the excess, you'll need to calculate and withdraw those attributable earnings too (and pay income tax plus potentially a 10% early withdrawal penalty on those earnings). Have you figured out how much your $1,100 excess has earned since 2019? That might be relevant depending on how you ultimately resolve this.
That's a really good point I hadn't considered. I haven't calculated the exact earnings on the excess portion, but given market performance since 2019, it's probably significant. If I'm using the "absorption" method by under-contributing in 2021, do I still need to worry about the earnings issue? Or does that only apply if I'm physically removing the excess contribution?
If you're using the "absorption" method by under-contributing in a later year, you don't need to worry about withdrawing the earnings. The earnings stay in your Roth IRA and continue growing tax-free, which is actually a nice benefit! The earnings only become an issue if you physically withdraw the excess contribution. In that case, you'd need to calculate and withdraw the proportional earnings as well. Since you've already effectively "fixed" the excess through your 2021 under-contribution, you just need to file Form 5329 for 2019 and 2020 to pay the penalty for those years. The earnings can stay put in your account.
Everyone's focusing on getting the documents, but I want to address what ACTUALLY happens if you don't file: 1. The IRS will eventually send notices (CP59 Notice) 2. They might file a "Substitute for Return" based on income info they have, which won't include any deductions/credits you'd qualify for 3. They'll assess tax, penalties and interest 4. They can eventually garnish wages, take money from bank accounts, and seize tax refunds for YEARS 5. There's no statute of limitations on unfiled returns, so this can haunt you forever I ignored filing for 3 years when I was younger and it took me 6 years to clean up the mess. DON'T DO IT.
Did they ever come to your house or anything? That's what I'm worried about. Also did it affect your credit score?
They never came to my house - that's pretty rare unless you're being investigated for tax fraud involving large amounts of money or criminal activity. The IRS generally handles everything through mail notices and phone calls before taking more serious collection actions. It absolutely destroyed my credit score for years. The tax liens showed up on my credit report and dropped my score by over 100 points. This affected my ability to get apartments, car loans, and credit cards. Even after I paid everything off, the damage lingered for a while. The credit reporting rules have changed somewhat since then, but tax problems can still indirectly affect your credit when they impact your financial situation.
Some practical advice: even with missing docs, FILE SOMETHING by the deadline (April 15)! You can file Form 4868 for an automatic extension to October, then use that time to get your docs sorted. The extension doesn't extend the time to pay, but it prevents the nasty failure-to-file penalty which is much worse than the failure-to-pay penalty.
Wait so if I file for an extension I still need to pay what I think I might owe? How do I even calculate that without my W-2??
Yes, you're expected to make a good-faith estimate of what you might owe and pay that amount when you file the extension. Without your W-2, you can estimate based on your final paystub of the year, which usually has year-to-date information. Most paystubs show how much federal tax was withheld throughout the year. If you don't have your last paystub, you could also estimate based on last year's return if your income situation was similar, or check your bank deposits to calculate approximately what you earned and estimate taxes from there. Even if your estimate isn't perfect, showing that you made a reasonable effort to comply will usually help reduce penalties.
Something nobody has mentioned yet - have you asked the apartment complex if they'll accept proof that you've submitted the ITIN application? Many places will let you sign the lease if you can show them the W-7 that's been submitted. Also, would they accept her as an occupant but not on the lease? That might be a workaround if you qualify for the apartment based on just your income.
Thanks for this suggestion! I actually tried asking if they would accept proof of application but they were pretty firm about needing the actual ITIN before finalizing the lease. I didn't think about the occupant vs. lease-holder distinction though - that's a really good idea. I'll check if my income alone meets their requirements. The only concern is that many places have rules about all adults living in the unit being on the lease. I'll definitely bring this up with them tomorrow. Really appreciate the suggestion!
Has anyone actually challenged an apartment complex on this requirement? My understanding is they need either an SSN or ITIN for credit check purposes, but a foreign national with no US credit history won't have a US credit report anyway, so what are they actually checking?
They use it for identity verification and for potential collections if you break the lease. Without an ITIN or SSN, they have no way to report to credit bureaus or track you down if you skip out on rent. Some places will accept a larger security deposit instead.
That makes sense, thank you. I hadn't considered the collections angle. I wonder if offering an additional security deposit might work in the original poster's case. Seems like that would address their concern about potential risk.
Omar Farouk
Some other AGI-lowering strategies to consider: - Unreimbursed partnership expenses if applicable - Capital loss harvesting (sell investments at a loss) for up to $3k AGI reduction - Contribute to traditional IRAs for both of you if eligible - Check if you qualify for the student loan interest deduction - Certain educator expenses if either of you are teachers - Health insurance premiums if self-employed Honestly though, with a $19k gap to close, it's going to be tough unless you have some business losses or other major deductions available.
0 coins
Malik Jenkins
β’Thanks for these suggestions! We don't have any partnership income or self-employment, but the capital loss harvesting is interesting. We do have some investments that haven't performed well. Would selling those at a loss help lower AGI this year?
0 coins
Omar Farouk
β’Yes, capital loss harvesting would help lower your AGI. You can deduct up to $3,000 in net capital losses against ordinary income per year, which directly reduces your AGI. If you have investments that are currently at a loss, selling them would realize those losses that you can use on your tax return. Just be aware of wash sale rules - if you buy substantially identical investments within 30 days before or after selling at a loss, you can't claim the loss for tax purposes.
0 coins
Chloe Martin
Any chance either of you have student loans? The student loan interest deduction can reduce AGI by up to $2,500, but it phases out at higher incomes. Still, every bit helps. Also, does your company offer any pre-tax benefits you're not taking advantage of? Some employers offer things like dependent care FSAs, commuter benefits, etc. that can lower your taxable income.
0 coins
Diego FernΓ‘ndez
β’The student loan interest deduction phases out completely for married couples filing jointly when MAGI reaches $155,000, so that wouldn't help in their situation with $227k income unless they file separately. And if they file separately, neither spouse can claim the student loan interest deduction at all. It's one of those weird tax rules.
0 coins