Underpayment Penalty (Estimated Tax)
The underpayment penalty applies when a taxpayer does not pay enough tax through withholding or estimated payments during the year. Safe harbors: pay 100% of prior year tax (110% if AGI exceeds $150,000) or 90% of current year tax.
Exam Tip
Safe harbors: 90% current year OR 100% prior year (110% if AGI > $150K). No penalty if <$1,000 owed. Form 2210 calculates penalty. Withholding = treated as paid evenly.
What is the Underpayment Penalty?
The estimated tax underpayment penalty (IRC 6654) is calculated per quarter when a taxpayer fails to pay enough tax throughout the year via withholding or estimated payments.
Safe Harbor Rules
| Safe Harbor | Requirement |
|---|---|
| 90% of current year | Pay at least 90% of current year tax |
| 100% of prior year | Pay at least 100% of prior year tax liability |
| 110% of prior year | Required if prior year AGI > $150,000 ($75K MFS) |
Estimated Tax Due Dates
| Quarter | Period | Due Date |
|---|---|---|
| Q1 | Jan 1 - Mar 31 | April 15 |
| Q2 | Apr 1 - May 31 | June 15 |
| Q3 | Jun 1 - Aug 31 | September 15 |
| Q4 | Sep 1 - Dec 31 | January 15 |
Key Exceptions
No penalty if: (1) tax owed is less than $1,000 after withholding, (2) withholding covers 100%/110% of prior year tax, or (3) taxpayer is a qualifying farmer or fisherman (special rules apply).
Exam Alert
Safe harbors: 90% of current year OR 100% of prior year (110% if AGI > $150K). Penalty computed per quarter using Form 2210. Withholding is treated as paid evenly throughout the year even if withheld unevenly.
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Related Terms
Estimated Tax Payments
Estimated tax payments are quarterly tax payments made by individuals and businesses who expect to owe $1,000 or more in tax after subtracting withholding and credits.
Withholding (Tax)
Withholding is the portion of an employee's wages that an employer deducts and remits directly to the IRS as prepayment of income tax. Form W-4 determines the withholding amount. Withholding is treated as paid evenly throughout the year.
Penalty Abatement
Penalty abatement is the removal or reduction of IRS penalties due to reasonable cause or first-time penalty abatement (FTA) relief for taxpayers with a clean compliance history.
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