Simply put, an underpayment tax penalty can be defined as a fine imposed on an individual or taxpaying corporate institution for not paying their total estimated taxes on time and withholding due. The IRS form 2210 is used for the reporting of underpayment. Note that the amount of an underpayment penalty is depending on an American's outstanding debt and the length of time it has been past due. Typically, underpayment penalties are approximately 0.5 percent of the underpaid amount and capped at 25 percent. Likewise, underpaid taxes also accrue interest set by Internal Revenue Structure annually. Many a time, calculating the underpayment tax penalty can be complicated, and it is such a context that an underpayment penalty calculator comes to the rescue.
THE WORKINGS OF UNDERPAYMENT PENALTY
Those who owe the IRS less than USD 1000 in tax withholdings or who have paid at least 90% of the tax for the current year or 100% for the previous year are exempt from the IRS underpayment penalty.. Paying taxes late might result in a penalty that is based on the amount of money that has been owed and how long it has been overdue, so it is important to know how much you owe. In case of failure to pay the penalty, the IRS can take the following actions –
The IRS has set the late filing penalty at 0.5 percent of the tax a citizen owes after the due date, and the tax remains unpaid each month. The upper limit of the penalty is 25 percent.
After 10 days of nonpayment, the IRS issues a final notice of intent to seize a citizen’s property. After that, the 0.5 percent rate of the late filing fine increases to 1 percent per month.
If an installment agreement is reached, the penalty can be decreased to 0.25 percent.
It is noteworthy to mention that American taxpayers can avoid the IRS penalty if they provide valid reasons for nonpayment of taxes on time.
EXCEPTIONS TO UNDERPAYMENT TAX PENALTY
Under certain circumstances, people are not a penalty, and some of the situations include –
The person had no tax liability for the previous year, and they were an American citizen or resident alien for one entire year.
The total tax liability is less than USD 1000
In case of a casualty or disaster
In case someone is retired or disabled.
It is noteworthy to mention that citizens can avoid the IRS underpayment penalty by altering their withholdings. If a person realizes before the end of the year that they owe the state more taxes than they are withholding, they can file a W-4 form with their employer. They will not be penalized if they manage to withhold the total amount of taxes by the end of the year.
The nitty-gritty of underpayment penalties are many, and it is crucial to take the assistance of tools like an underpayment penalty calculator is of incredible help. They are accurate, reliable, and can help workers recognize their unpaid dues at the right time.
