The IRS imposes an underpayment penalty if you do not pay enough estimated taxes on your income or if you are late making the payment. Keep in mind that this penalty can still apply even if you the IRS owes you a refund. The IRS also charges interest on penalties.
How to avoid an Underpayment Penalty
The only way to avoid an underpayment penalty is to pay the tax due at the time that it due. Remember, payments are due quarterly and not just when the tax return is filed.
The Individual Penalty can also be avoided if the following are true:
- You filed tax return shows you owe less than $1000 or
- You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the prior year return( whichever is less).
Remove/Reduce a Penalty
There are situations where the penalty can be reduced or waived.
- You or your spouse (if filing MFJ) retired in the past 2 years after reaching age 62 or became disabled and there is reasonable cause to underpay or pay late.
- Most of the taxes paid or withheld were done in the early part of the year instead of spreading it out equally throughout the year.
- Your income varies throughout the year.
You would complete Form 2210 to apply for the waiver or reduction in the penalty.
You can dispute the penalty with the IRS if the penalty was due to written advice provided to you from the IRS.