Guide to Underpayment of Estimated Tax by Law Offices of Nick Nemeth
  • July 27, 2017
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Owing taxes could mean additional penalties and interest that could have a substantial impact on your financial condition. Most of the tax penalties are triggered by not paying what an individual owes, not filing a tax return, or not paying enough tax to the IRS throughout the year.

In this blog post, we cover the basics of underpayment penalties and interests imposed by the IRS and how to save yourself from the additional financial burden. Read on.

Understanding Underpayment Penalty

The taxes in the U.S. are collected on the pay-as-you-earn system and the amount is deducted from paychecks of most of the individuals. The IRS, however, wants estimated quarterly payments from taxpayers if:

  • The employer does not withhold taxes from paycheck
  • The withholding amount does not cover the entire income of the taxpayer
  • The taxpayer is an independent contractor

An underpayment penalty is imposed if the individual fails to make an estimated tax payments during the year or the amount withheld from other income is less than 90 percent of the total tax to be paid to the IRS.

Calculating Underpayment Penalty

The IRS calculates the tax amount that an individual should have paid in every quarter and applies a percentage to derive total penalty amount for every quarter. There are, however, a few exceptions where the IRS will not impose a penalty of the taxpayer. These are:

  • The total withholding and estimated quarterly tax payments were almost same as the previous-year tax
  • The taxpayer had no liability last year and was a resident alien or U.S. citizen for the entire year
  • 90 percent of the current year’s tax is already withheld from the paycheck of the taxpayer
  • The amount owed is more than the withholding but not over $1,000
  • There is no withholding tax and the tax amount for previous year is less than $1,000

Ways to Reduce or Do Away With the Penalty

The taxpayer can file form 2210 to avoid or reduce the penalty, if:

  • The estimated quarterly tax payments were timely and adequate
  • A large part of the income was made later in the year
  • A large part of the income was made earlier in the year (For example, you added a large overpayment from previous year’s return to the taxes in the current fiscal year)
  • The filing status changed to or from married filing jointly
  • A disaster or casualty occurred and it is unfair for the IRS to impose a penalty
  • There is a reasonable cause because the taxpayer is retired or disabled

Final Words

If the taxpayer finds out that the taxes owed by the end of the year will be more than what is currently being withheld a new W-4 form should be filed. No penalty will be imposed if the full amount of taxes is withheld at the end of the year. If you want to learn more about the Underpayment Penalty or need help in settling an IRS tax debt issue, feel free to get in touch with The Law Offices of Nick Nemeth. With experience of more than a decade and a half, we are helping businesses and individuals with diverse IRS tax debt problems. Call us at (972) 426-2553 or fill out the contact form and we will get in touch with you shortly.

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What Our Clients Have to Say

Susan WilsonSusan Wilson
03:27 25 Jan 23
I have been very pleased with the solid counsel and guidance that Nick Nemeth has provided me regarding my tax issue. I found him to be honest and straightforward which I appreciated. I was impressed with his relevant experience and knowledge . He has definitely brought me peace of mind during a difficult and stressful time.
Sarah HowardSarah Howard
03:44 14 Nov 22
I would like to thank Mr. Nick and his staff for the superb help that I received from them. My IRS problem was resolved quickly and efficiently. It took 2 visits to convince me that I was over my head. I thought that I could call the IRS, appeal my tax notices and settle on a payment plan on my own. After many phone calls to the IRS, waiting sometimes more than 4 hours with no resolution to speak of, it proved to be extremely difficult and stressful. Revisiting Mr. Nick was a huge wake up call. My account was reviewed, and a payment plan was established with the IRS within a week. I will be forever grateful to the staff who worked on my case and especially to Lorna who listened to me vent while going through this painful process.
00:33 07 Aug 22
I cannot say enough good things about Nick and his team. When I first met with Nick he was up front, honest, friendly and efficient. When I worked with one of his attorneys, Eric B, I was just as pleased. All of the staff there are nice and very helpful. I wish I hadn't waited so long to get help with my issue. Over 6yrs I tried getting through and getting anywhere with the IRS and hardly made any progress. I know this may not be the case for all, and even I thought it would take longer than it did, but 3mos and they had my situation straightened out. I still can't believe it. Thank you thank you THANK YOU for all that you did for me. This is a huge burden gone out of my life now thanks to you. If anyone needs help out there, I know you may not want to shell out more money to get their help but it may just save you in the long run.
Spoilly GirlSpoilly Girl
23:49 03 Aug 22
The Nemeth Law team is exceptional. They treat their clients like a family member who is in crisis. They want you to get the best possible outcome. I really appreciate everything that they did for me. Jake and Ashley had the greatest role in my case and it all turned out for the best for me. Thank you Nick and team for easing my fears and getting me through the long process. I'm truly grateful.
Eddie WaltEddie Walt
19:44 12 Jul 22
During a time in which competent, professional service at a fair price seems to have disappeared, Mr. Nemeth and his team are a refreshing breath of fresh air.From my first phone call to the final settlement of our case with a non-responsive IRS, they under-promised, over-delivered and were in constant courteous contact to make sure we knew exactly what was happening and where we stood.I hope to never need their services again, but, should I receive another friendly letter from the IRS...I know who to call!
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