IRS charged a penalty for OVERPAYING our taxes...WTF?

Question

Recently received a refund check because my husband and I apparently overpaid our estimated taxes for the year...and the IRS charged us a $125 penalty. I guess I could understand if we underpaid...but they charged US for holding onto OUR money? If anything, don't you think they should be paying US interest??? UGH!

Answer 1

The estimated tax penalty is separate from any refund.

Did you make 4 identical payments on 4/15/07, 6/15/07, 9/15/07 and 1/15/08?  Was the amount equal to 1/4th of last year's tax liability (or 110% if your income was high).

Answer 2

That makes no sense - they don't charge a penalty for overpaying.  Did you maybe make one or more of your payments late?  That would result in a penalty.

Answer 3

There are penalties for many things, but not for overpaying.  They charged you a penalty for something else.  As some other answers note, it may be for late payments.  However, it may be for something unrelated to estimated payments.  For example, it may be a penalty for taking money from an IRA before age 59-1/2.  I would need more information to say why you were charged a penalty.  Or you could call the IRS and ask them.

Answer 4

The amount of the penalty for failing to pay estimated tax is based on when the estimated tax payments were due.  You ordinarily owe four payments throughout the year.  If you load up towards the end you could still incur a penalty.  You may be able to lower or eliminate the penalty with an alternate computation on Form 2210.