Penalty for Underpayment of Estimated Tax Simplified

Penalty for Underpayment of Estimated Tax

Under the US tax law , a taxpayer is supposed to estimate current year income and tax thereon. Then, you are supposed to pay the tax on estimated income in four quarterly installments. The payment of your expected liability can be either directly depositing or through withholding of estimated tax payments. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method

Penalty for Underpayment of estimated tax

Penalty provision is triggered automatically if you didn’t pay enough tax throughout the year. In case , you are liable to penalty for underpayment , how do you compute it . In case , you want to compute the penalty for underpayment of estimated tax by anyone other than Corporation, use the Form 2210, Underpayment of Estimated Tax by Individuals, Estates. For Corporation, you can use Form 2220, Underpayment of Estimated Tax by Corporations. The form contains a flowchart that will help you find out whether you owe a penalty. You can also use our penalty for underpayment of estimated tax calculator

When Penalty for Underpayment may not be Applicable

The penalty for underpayment may not apply in following situations

  • you owe less than $1,000 in tax or
  • 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 Internal Revenue Code provides special rules for farmers and fishermen, certain household employers and certain higher income taxpayers about the imposition of penalty for estimated tax . You can refer to Publication 505, Tax Withholding and Estimated Tax.

Can IRS Waive Penalty for Underpayment?

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.