The U.S. tax system is pay-as-you-go, which means you’re required to withhold or pay estimated taxes as you earn or receive income. Generally, the IRS expects you to pay at least 90% of the total you owe for the current tax year – or 100% of the tax shown on last year’s return, whichever is less – by the time you file your federal return, which is typically April 15.
What is the underpayment penalty?
The underpayment penalty is a fine the IRS may charge taxpayers who don’t pay enough tax through withholdings or estimated payments during the tax year. The IRS imposes different penalties in hopes of encouraging taxpayers to follow IRS rules.
How they Calculate the Penalty
They calculate the amount of the Underpayment of Estimated Tax by Individuals Penalty based on the tax shown on your original return or on a more recent return that you filed on or before the due date. The tax shown on the return is your total tax minus your total refundable credits.
They calculate the penalty based on:
The amount of the underpayment
The period when the underpayment was due and underpaid
The interest rate for underpayments that we publish quarterly
Interest on a Penalty
They charge interest on penalties.
The date from which we begin to charge interest varies by the type of penalty. Interest increases the amount you owe until you pay your balance in full.