Penalty for Underpayment of Estimated Tax Simplified!

What is the penalty for underpayment of estimated tax? Actually, under the US tax law (please refer IRC 6654 ) a taxpayer is supposed to estimate current year income and tax thereon. Then, he/she is supposed to pay the tax on the estimated income in four quarterly instalments. The payment of estimated tax liability can be done in two ways. If there is a shortfall in the payment of estimated tax, IRS charges interest for the shortfall. That is called the estimated tax underpayment penalty.

How do you compute penalty for underpayment of estimated tax?

A taxpayer can compute the penalty for underpayment of estimated tax by using the Form 2210, titled Underpayment of Estimated Tax by Individuals, Estates. For the corporation, you can use Form 2220, Underpayment of Estimated Tax by Corporations. These forms have a flowchart that will let you find out whether you owe a penalty. You can also use our penalty for underpayment of estimated tax calculator

What are IRS tax underpayment penalty exceptions?

IRS may not impose a penalty for underpayment of estimated tax in the following situations

  1. You owe less than $1,000 in tax or
  2. You have already paid/withhold at least 90% of the tax for the current year or already paid 100% of the tax shown on the return for the prior year, whichever is smaller.

Please note that the Internal Revenue Code provides special rules for farmers and fishermen, and certain higher-income taxpayers about the imposition of a penalty for estimated tax. You can refer to Publication 505, Tax Withholding and Estimated Tax.

Can IRS Waive Penalty for Underpayment of estimated tax?

The answer is Yes , but in certain circumstances only. The power to waive the penalty for underpayment of estimated tax is discretionary to IRS and can be invoked for any one of the situations mentioned below:

  1. Failure to pay the estimated tax was on account of some emergency or disaster, or other unusual circumstance to the extent that it would be inequitable to impose the penalty, or
  2. You became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect,
  3. You retired after reaching age 62 , during the tax year and the underpayment was due to reasonable cause and not willful neglect,
  4. The underpayment was due to an inability to accurately calculate your estimated income tax payment due to the breadth of changes enacted by the tax reform.
penalty for underpaymentpenalty for underpayment of taxes
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