Understanding the Underpayment Penalty: What You Need to Know
Definition & Meaning
An underpayment penalty is a tax penalty imposed on individuals who fail to pay enough of their total estimated tax and withholding. This penalty applies when a taxpayer does not meet the minimum payment requirements set by the Internal Revenue Service (IRS). To avoid this penalty, individuals can ensure they pay either 100 percent of the previous year's tax or 90 percent of the current year's tax through estimated payments and withholding. If a taxpayer incurs an underpayment, they must report it using Form 2210.
Legal Use & context
The underpayment penalty is relevant in the context of federal tax law and is primarily used by the IRS to encourage timely tax payments. Taxpayers may encounter this penalty when filing their annual tax returns if they have not paid enough throughout the year. Individuals can manage their tax obligations and avoid penalties by using legal forms and templates provided by services like US Legal Forms, which offer resources to help users calculate and remit the appropriate amounts.
Real-world examples
Here are a couple of examples of abatement:
(Hypothetical example) A taxpayer who owed $5,000 in taxes last year would need to pay at least $5,000 this year to avoid an underpayment penalty. If they only paid $3,000 throughout the year, they would face a penalty on the $2,000 underpayment.