 Hello and welcome to this session in which we would look at this exercise that illustrate the concept of failure to pay your taxes, failure to file and failure to pay the estimated income tax. This topic is important. It's on the CPA exam as well as your income tax course. You want to make sure you are familiar with this concept. I do have recording about this also if you are studying for your CPA exam I strongly suggest you check out my website farhatlectures.com. I don't replace your Becker, Roger, Gleam or Wiley. That's not what I do and I can do that. I can be a useful addition to your CPA review course. I can add 10 to 15 points. How do I do so? I explain the material differently. No better, no less. Differently. You may need that different explanation, different perspective to understand the material better and your risk is subscribing for one month. Your return is possibly passing the exam. If you don't like it you can cancel but you would lost one month of subscription but the alternative is not the alternative. The payout is good if it works for you. If not for anything check out my website to determine how well is your university doing or not doing for the CPA exam. I do have resources for other accounting as well as CPA courses. Please connect with me on LinkedIn and on LinkedIn you can view my LinkedIn recommendation actual CPA candidate that used my system. Please like this recording, connect with me on Instagram and Facebook. So Maggie's 2020 tax return was due on April 15, 2021 but she did not file it until June 12, 2021. So Maggie was late and Maggie did not file an extension. So although you file an extension you still have to send the money if you owe any money. Remember that just file an extension. It doesn't mean you don't have to pay the money. The tax due on the tax return when filed was 8,500. So that's the check that Maggie had to write. In 2020 Maggie paid 12,000 through withholding. What does that mean? It means she paid from her W-2. Her W-2 showed 12,000 of withholding. Then she paid herself 8,500 when she filed the return. What does that mean? It means her total tax bill was 20,500 dollars. Her tax liability was 11,500 the prior year. So for the prior year her tax liability was 11,500. 2020 this is 2020 it was 20,500. Maggie's AGI is less than 150,000. How much penalty will Maggie have to pay this regard interest? Now we have to determine what's the penalty that Maggie have to pay. Well for one thing she was late for two months from April 15th till June 15th. Well failure to pay she did not pay her taxes. How much did she owe? She owe 8,500 dollars. So let's start with failure to pay for those two months. Failure to pay we're going to multiply this by 0.5 percent. Let's just make sure we we go through this 0.5 percent then multiply this by two. That's going to be her failure to pay and failure to file because she did not file failure to file 8,500 times here the penalty is 5 percent times two months as well. Okay now let's compute this. This is going to be a little bit redundant but I'm going to have to do this just to show you the concept as well because it's important to understand what concept is taking place here. So let's do this. So if we take now remember this is 0.5 percent which is 0.005 we're going to take 0.005 times two times 8,500 and that's going to be 85 dollars for failure to pay. Then failure to file is 5 percent times two is 10 percent which is 0.1 times 8,500 that's 850 dollars. Now if both penalties apply in the same period which they do for two months then guess what then we'll kind of kind of the IRS says you don't have to pay failure to pay so we can you don't have to pay failure to pay okay therefore those two penalties the total is 850 simply put they in a sense they not they give you a credit but since they are run concurrently they said if they are run concurrently you just have to failure to file penalty not failure to pay you don't worry about failure to pay as long as these two penalties run concurrently which they did for those two months. Now that's her penalty now what about failure to pay estimated income tax she did not pay enough income tax is there a penalty for that well for one thing she's less than 150,000 and if that's the case there are certain rules okay to avoid this penalty they must pay either through withholding a minimum of 90 percent of the current tax or 100 percent of the prior tax assuming the AGI is less than 150 so how can how can how can how can she avoid the penalty well we have to find out what's 90 percent of 20,500 well we really don't have to do that but I'm going to show you the concept the reason I say this because because Maggie paid 20,000 I'm sorry not 20,000 well because the second rule is 100 percent of prior year she did pay 100 percent of prior year the prior year she paid 11,000 she paid 11,000 and this year she paid 12,000 therefore she needed 100 percent of the prior year but just I want to show you the the computation is let's see 20,500 times 0.9 which is she did not pay 8,450 so she did not meet 90 percent of the current year but she meet 100 percent of the prior year she paid little bit more than the prior year just from her withholding for some reason it seems Maggie got a side job and made some extra money and did not pay taxes on this extra money this is what it looks what happened really from this so this is so this is the penalty so there is no penalty for failure to pay estimated taxes there is no penalty for that okay therefore what we did is we computed the failure to pay that we did not count it because failure to file if they both run concurrently we just go 850 no penalty for failure to pay estimated income taxes once again I'm going to invite you to check out my website farhatlectures.com this topic is important for the CPA exam so you really want to know how you compute all these penalties there are different type of penalties I explain it in details good luck of course study hard and stay safe