What is the Colorado Underpayment Penalty (Form CO 204)?

Colorado may assess an underpayment penalty if a taxpayer does not pay enough tax throughout the year through withholding, estimated tax payments, or a combination of both.

This section is used to calculate any penalty that may apply and to determine whether the taxpayer qualifies for an exception or a reduced penalty.

Program Entry

Colorado Return → Miscellaneous Forms → CO 204 Underpayment Penalty

When Might an Underpayment Penalty Apply?

Colorado may assess an underpayment penalty when:

• A taxpayer has a balance due on the Colorado return.
• Sufficient tax was not paid during the year through withholding or estimated tax payments.
• Required estimated payments were not made by the applicable due dates.

Taxpayers who receive income not subject to withholding, such as self-employment income, investment income, rental income, or pass-through income, are more likely to be affected.

The Following Information Will Be Needed

Prior Year Tax Liability

Enter the Colorado tax liability from the prior year's return.

This amount is used to determine whether the taxpayer satisfies one of Colorado's safe harbor provisions.

Prior Year Adjusted Gross Income

Enter the prior year's adjusted gross income.

Colorado uses prior-year income information when applying certain underpayment penalty calculations.

Estimated Tax Payments

Enter the estimated tax payments made during the year for each payment period:

• April payment
• June payment
• September payment
• January payment

These amounts are used to determine whether sufficient payments were made by each required due date.

Colorado Withholding

Enter Colorado withholding attributable to each payment period.

The worksheet allows withholding to be allocated by quarter when calculating the penalty.

If withholding occurred evenly throughout the year, the total withholding can generally be divided evenly among the periods.

Payment Dates

If an underpayment was paid after the original due date, enter the date the payment was made.

The penalty calculation may be reduced when an underpayment is corrected before the return is filed.

Annualized Installment Method

Taxpayers whose income was not earned evenly throughout the year may elect the Annualized Installment Method.

This method may reduce or eliminate an underpayment penalty when income was received later in the year rather than evenly throughout all four payment periods.

Examples include:

• Seasonal businesses
• Taxpayers with large year-end bonuses
• Taxpayers who sold investments later in the year
• Individuals who began self-employment during the year

How Does This Affect My Return?

The information entered on Form CO 204 is used to:

• Calculate any Colorado underpayment penalty.
• Determine whether the taxpayer qualifies for a safe harbor exception.
• Determine whether the Annualized Installment Method produces a lower penalty.
• Calculate the correct penalty amount when late estimated payments were made.

If no penalty applies, this form may not affect the return.

Notes

• An underpayment penalty is separate from any penalty or interest assessed on an unpaid balance due.
• Estimated payments and withholding are both considered when determining whether sufficient tax was paid during the year.
• Taxpayers with uneven income throughout the year may benefit from using the Annualized Installment Method.
• Enter estimated payments and withholding in the correct payment periods to ensure the penalty is calculated accurately.
• Keep records of all estimated tax payments and withholding amounts used in the calculation.