LA County Wildfire Disaster Relief: The Annualized Method Workaround That Eliminates the Underpayment Penalty — Without a Waiver Fight

This post is written for tax practitioners with clients in Los Angeles County filing their 2024 and 2025 federal and California returns. The same analysis applies to any affected taxpayer or representative navigating the wildfire disaster relief provisions.

Let's get to the point. Your LA County clients may have an underpayment penalty sitting on their return. The IRS disaster relief sounds like it should fix it — and mostly it does — but the mechanics matter, and if you're not using the right tool, you're either fighting a waiver battle you don't need to fight or leaving a penalty on the return that shouldn't be there.

Here's the approach that works cleanly: run the annualized income installment method on Schedule AI with zero income in the postponed periods, pull the resulting installment number, and carry it to Form 2210 Box B. Then write Los Angeles Fire on the top of the 1040, the 2210, and the California forms. Done. No waiver argument. No IRS discretion. The math produces the right answer on its own.

I'll explain exactly why this works, what the legal authority is, and how to execute it step by step.

What Was Actually Postponed — and Why It Matters

The IRS issued IR-2025-10 following FEMA Disaster Declaration 4856-DR for Los Angeles County. The relief is automatic for any taxpayer with an IRS address of record in Los Angeles County. No special form to request it. No phone call required. Automatic.

Here's the full picture of what was postponed to October 15, 2025:

Four payment obligations — including the Q4 2024 installment that was already due January 15 — were all collapsed into a single October 15, 2025 consolidated deadline. Q4 2025 (January 15, 2026) was never part of the relief window. That's your only live exposure point, and we'll get to it.

The disaster relief didn't just extend the filing deadline. It legally eliminated the payment obligation for four consecutive installment periods during the postponement window.

The Legal Authority Behind This Approach

Two statutes do the work here:

IRC §7508A — The Postponement Authority

This is the statute that gives the IRS authority to postpone tax deadlines following a presidentially declared disaster. When the IRS exercises this authority, the postponed deadlines are treated as if they were never originally due during the postponement period. The payment obligation doesn't just move — it is legally rescheduled. No payment was required during the postponed window.

IRC §6654(e)(3)(A) — The Disaster Waiver

This is your backup. If any penalty survives the annualized method analysis, this statute permits a full or partial waiver when the underpayment was due to a casualty, disaster, or unusual circumstance and imposition of the penalty would be against equity and good conscience. This is a facts-and-circumstances standard — it is not limited to specific quarters. You can argue the entire year if the client's situation supports it.

The IRM at 20.1.4.1.3.4 confirms that IRS policy for federally declared disaster areas is to abate penalties for affected taxpayers during the postponement period. You're not asking for a favor. You're documenting what the law already provides.

The Workaround: Step by Step

Here's exactly how to execute this on the return.

Step 1 — Write "Los Angeles Fire" on Every Affected Form

This is not optional and it is not just for appearances. Per IRS guidance and FTB instructions, this notation at the top of the return — in blue or black ink, or entered via software per program instructions — is the trigger that flags the return for disaster relief treatment. Write it on:

• Federal Form 1040 — top of the return
• Federal Form 2210 — top of the form
• California Form 540 — top of the return
• California Form 5805 (underpayment) — top of the form

Also note FEMA Disaster Declaration 4856-DR wherever the software provides a disaster declaration field.

Step 2 — Check Prior Year Safe Harbor First

Before you touch Form 2210, verify whether the client is already covered. If they paid 100% of their 2024 tax liability through withholding and/or estimated payments — or 110% if 2024 AGI exceeded $150,000 — the underpayment penalty is fully avoided. No further analysis needed. This is your fastest resolution for the largest portion of your client base.

Run this check first. Don't spend time on the annualized method for clients who are already safe.

Step 3 — Run Schedule AI with Zero Income for Postponed Periods

For clients who don't meet the prior year safe harbor, here's the core move:

On Schedule AI (the Annualized Income Installment Method on Form 2210), enter zero income for the annualization periods corresponding to the postponed payment dates — Q4 2024 through Q3 2025. This is not fabricating numbers. This is the mathematically accurate representation of the situation: no income was required to generate an estimated payment obligation during those periods, because no payment was legally due.

When the required installment for a period is zero, there is no underpayment for that period. The penalty calculation produces zero. Not a waiver — the correct answer.

Step 4 — Pull the Resulting Dollar Amount and Enter on Form 2210 Box B

Schedule AI produces an annualized required installment figure. Take that number and carry it to Form 2210, Part II, Box B — the annualized income installment method election. This is the box that tells the IRS you are computing the penalty under the annualized method rather than the regular equal installment method. Checking Box B and entering the Schedule AI result locks in your computation.

Your software will walk through this if you've set it up correctly. The key is making sure the zero-income periods are properly reflected in Schedule AI before pulling the Box B figure.

Step 5 — Analyze Q4 2025 Independently

Q4 2025 (January 15, 2026) was never postponed. Analyze it on its own:

• Did the client make the Q4 payment on time?
• Does the annualized method for Q4 reduce exposure based on actual Q4 income?
• Is the client covered by the prior year safe harbor for the Q4 installment specifically?

For most clients, Q4 is the only live exposure point. Focus your analytical energy here.

Why This Is Better Than Filing a Waiver Request

You have two paths to eliminating the penalty:

Path 1 — Waiver Request (IRC §6654(e)(3)(A)): Attach a written statement to Form 2210. Explain the disaster's impact on the client. Request that the IRS exercise discretion to waive the penalty. This works — but it requires IRS approval, it can be reviewed, and it depends on a facts determination that you are making a good-faith argument the IRS needs to agree with.

Path 2 — Annualized Method (Schedule AI + Form 2210 Box B): Enter the zero-income periods. The math produces zero underpayment for the postponed periods. No IRS discretion required. No waiting. No argument to win.

Path 2 is superior because it is self-executing. A zero required installment for a period where no payment was legally due is not a position — it is an arithmetic result. If the IRS questions it, your answer is simple: what is the required installment for a period where no payment was due? Zero. What is the underpayment when the required installment is zero? Zero. What is the penalty on a zero underpayment? Zero.

That's a math conversation, not a facts conversation. Math conversations with the IRS go faster.

The Backup: Full-Year Waiver When the Facts Support It

If a client still has residual penalty exposure after the annualized method — typically a Q4 2025 gap — and the disaster genuinely disrupted their finances throughout the year, the IRC §6654(e)(3)(A) waiver argument is available for the full year. Not just the postponed quarters. The statute is not period-limited.

A strong full-year waiver argument requires:

• Business destruction, displacement, or significant income disruption traceable to the January 2025 fires
• Documentation that the economic impact continued through Q4 2025
• A written statement on Form 2210 explaining why it would be inequitable to impose the penalty

A weak argument is: the client had money, chose not to make payments because the extension existed, and is now asking for the penalty to go away. That's not a casualty argument. That's a hope.

Know which situation you're in before you make the argument.

Triage Framework for a Large Client Base

If you're managing a full practice of LA County clients, you need a systematic sort before filing season accelerates. Here's how to bucket them:

If the IRS Sends a Penalty Notice Anyway

Automated penalty notices go out regardless of disaster relief markings. If your client receives a CP notice:

1. Call the IRS Disaster Hotline: 866-562-5227. IRS specialists trained for disaster cases can abate many penalties immediately over the phone. Fastest resolution for Bucket 1 and Bucket 2 clients who got caught by the automated system.
2. Respond with the Form 2210 documentation. Reference the Schedule AI computation, FEMA 4856-DR, and IR-2025-10.
3. First-Time Penalty Abatement (FTA) as a last resort. If the client has a clean compliance history — no penalties assessed in the preceding three years — FTA is administratively granted independent of the disaster argument. It doesn't require a facts determination and is one of the most underused tools in penalty response work.

Keep your clients out of direct IRS contact. Instruct them to forward any notices to you immediately and not to call on their own.

California (FTB) — Same Analysis, Same Execution

The FTB mirrored the IRS relief entirely. The same postponement dates apply. The same strategic approach works on the California return.

• Write "Los Angeles Fire" at the top of Form 540 and Form 5805 in blue or black ink (or follow software instructions for disaster notation)
• The FTB underpayment penalty is governed by California Revenue and Taxation Code §19136, which provides the same disaster waiver authority as the federal IRC §6654
• The annualized income method is available on the California return and produces the same mathematical result for the postponed periods
• If a client's consolidated payment made by October 15, 2025 exceeded $20,000, the FTB requires future payments be made electronically. If compliance is an issue, file FTB Form 4107 to request a waiver of the e-pay requirement

The Bottom Line

The practitioner who handles this well doesn't fight the IRS over a waiver. They run the annualized method, enter zero income for the periods where no payment was legally required, check Box B, pull the number, write "Los Angeles Fire" on the top of every relevant form, and move on. The math takes care of it.

Q4 2025 is the only quarter that stands outside the relief window. Analyze it on its own. For most clients, the gap there is either small or coverable by the annualized Q4 income calculation.

The practitioners who will struggle this season are those who either assume the disaster declaration made everything disappear automatically without doing the Form 2210 work — or who spend hours drafting waiver statements for situations that Schedule AI resolves in ten minutes.

Frequently Asked Questions

Does the LA County wildfire disaster relief waive the entire 2025 underpayment penalty?

Not automatically. The relief postponed all estimated payment deadlines from January 7 through September 15, 2025 to a single consolidated October 15, 2025 deadline — covering Q4 2024 and Q1 through Q3 2025 installments. Penalties for those periods are waived if payment was made by October 15, 2025. The Q4 2025 payment (January 15, 2026) was never postponed and must be analyzed independently. That is typically the only remaining exposure point for most clients.

Why use the annualized method instead of filing a waiver request?

A waiver request under IRC §6654(e)(3)(A) requires IRS discretion — you are asking them to agree with your facts argument. The annualized income installment method on Schedule AI produces the correct result mathematically: when no payment was legally required for a period due to the postponement, the required installment is zero, the underpayment is zero, and the penalty is zero. No argument to win. No waiting for approval. The math is self-executing.

Which forms require the "Los Angeles Fire" notation?

Write "Los Angeles Fire" at the top of federal Form 1040, federal Form 2210, California Form 540, and California Form 5805. Also reference FEMA Disaster Declaration 4856-DR wherever your software provides a disaster field. If filing electronically, follow your software's instructions — the notation is required even when the client's IRS address of record is already in Los Angeles County.

What estimated tax payments were actually postponed for LA County clients?

Four installments were postponed to October 15, 2025: Q4 2024 (originally January 15, 2025), Q1 2025 (originally April 15, 2025), Q2 2025 (originally June 16, 2025), and Q3 2025 (originally September 15, 2025). The Q4 2025 payment due January 15, 2026 was not included in the relief period.

Can I argue a full-year underpayment penalty waiver under the disaster code?

Yes. IRC §6654(e)(3)(A) is not limited to specific quarters. If the disaster genuinely disrupted a client's finances through Q4 2025, you can argue a full-year waiver by attaching a written statement to Form 2210 documenting the ongoing economic impact and asserting that imposition would be against equity and good conscience. That said, the Schedule AI approach for the postponed quarters is stronger because it is arithmetic — not a facts argument the IRS needs to accept.

Does California FTB provide the same relief as the IRS?

Yes. The FTB mirrored the IRS postponement for Los Angeles County taxpayers. The same October 15, 2025 consolidated deadline applied to California estimated payments. The FTB's waiver authority is California R&TC §19136. One California-specific note: if a consolidated payment by October 15, 2025 exceeded $20,000, all future FTB payments must be made electronically — file FTB Form 4107 if the client needs a waiver of that requirement.

What do I do if my client received a CP penalty notice despite the disaster relief?

Automated IRS notices go out regardless of disaster markings on the return. Call the IRS Disaster Hotline at 866-562-5227 first — specialists can abate many penalties immediately over the phone. If unresolved, respond with Form 2210 Schedule AI documentation referencing IR-2025-10 and FEMA 4856-DR. Last resort: First-Time Penalty Abatement is available independently of the disaster argument if the client has no penalties assessed in the prior three years.