Business, Legal & Accounting Glossary
Underpayment penalty is a tax penalty assessed by the IRS when estimated tax payments and/or income withholding are lower than minimum tax payments thresholds set by the IRS. The underpayment penalty stems from the fact that the US tax system is a “pay-as-you-go” tax system. Taxpayers must pay taxes as they earn income through the year (e.g. via withholding or estimated tax payments or combination of both) so inaccurate tax payments throughout the year can result in an underpayment penalty. In some cases, however, the underpayment penalty can be avoided. For example:
When an underpayment penalty is owed however, the underpayment penalty can be waived under the following circumstances:
To avoid an underpayment penalty, the IRS recommends that taxpayers make estimated tax payments in equal quarterly payments. Taxpayer can use Form 2210 (i.e. “Underpayment of Estimated Tax by Individuals, Estates, and Trusts) to determine if an underpayment penalty is owed due inadequate tax payments and whether or not such taxpayer is required to file form 2210 (e.g. taxpayer may owe an underpayment penalty and not be required to file Form 2210.)
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This glossary post was last updated: 5th February, 2020