Do you have a tax penalty for underpayment you need to pay? Know the facts with this guide to help you avoid penalties for underpayment.
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Tax Penalty for Underpayment | What You Must Know
Tax Penalty Definition: It is enacted on a taxpayer for not paying enough of the withholding and total estimated tax.
An Introduction to Tax Penalty for Underpayment
When tax season arrives, many people find themselves worried about the potential payments they might owe. Thousands of people discover each April that they did not pay enough in taxes, or they might not have enough funds to cover the tax bill at the end of the year.
If you did not pay enough in taxes, there are essential things you need to know about the tax penalty for underpayment.
How Does the Tax System Work?
In the United States, you must pay an income tax liability as you earn money. This means you make payments throughout the year.
Your employers might work with you to file a form for withholding tax. This means a certain amount of money is regularly taken out of each paycheck by the IRS.
Your other option is to clean your estimated tax. If you estimate your taxes, you will make payments four times in a taxable year.
These estimated payments are generally the same amount. If your taxable income changes a lot during the year, however, then your payments may need to change, too.
If you do not pay enough during the year, you may have to pay an IRS penalty. The IRS offers a form, known as Form 2210, to help you if you do not pay enough in your estimated tax.
Interest and Penalties on Taxes, How Much Will It Cost?
If you need to know how to file late taxes, anticipate a late penalty. The late filing fee is 5% of the taxes you still owe for every month you do not pay them.
If you do not file your taxes within 60 days of the due date, then you must pay either $135 or 100% of your unpaid tax liability, whichever is less.
Although you might find sites to help you file taxes late online for free, you should still prepare to pay these penalties.
It is important to seriously think about paying late taxes considering the cost of penalties for filing late taxes. Late fees also apply if you file your taxes but still do not finish paying them off.
The late payment fee is 0.5% of the taxes owed for every month they do not get paid.
If you need to calculate your IRS failure to pay penalty, there are several sites you can use. These sites can help you with an IRS interest calculator compounded daily.
You will be able to see how much you owe in real time. Remember, the IRS interest calculator keeps going up until you make a full payment.
To use this tool effectively, you need to secure a copy of your recent pay stubs and the previous year’s income tax return. After you fill out the information required by the underpayment penalty calculator, the tool will then recommend the number of allowances you should claim.
Pensioners and people with an annuity income can also utilize the tool by making changes through Form W-4P.
Once you have the means to pay your penalty, then get on with it. This will save you a significant amount of money.
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Does the IRS Ever Waive the Failure to Pay Penalties?
A few situations exist where the IRS will waive your penalties. You have to meet certain criteria to qualify, though.
The IRS will waive the penalty if you missed the payment because of an extreme situation. This might include death, disaster, or similar unexpected situations.
In other words, if your lack of payment was because of extreme circumstances and not negligence, then you may get excused.
If you do not fit the criteria for the waiver, then prepare to pay the penalties. If you are unable to make a one-time payment, get an IRS installment payment calculator to help you compute smaller amounts to pay over a certain period.
This will help you start making payments towards the IRS as you can. In the end, this helps to minimize your payments and document your efforts to satisfy your debt.
Does IRS Provide an Installment Plan for Paying Taxes?
If it’s difficult for you to pay your taxes, the IRS may provide an installment plan for you. This will let you pay what you owe without having to pay for other collection actions.
You can avail of this by speaking with IRS staff over the phone or online. The minimum payment requirement is the number you get after dividing the total amount owed by 72.
If you can pay what you owe in 120 days, the installment plan is no longer necessary. Otherwise, you will pay $52 for a debit agreement or $105 for a standard payroll deduction with the IRS. For low-income taxpayers, the fee may go down to $43.
For a balance of less than $10,000, your installment proposal will most likely be approved, as long as you pay off what you owe in three years, no minimum amount required.
Taxpayers with balances of $10,000 and above may qualify for a streamlined plan. Here you will have to pay what you owe in 72 months with a minimum payment requirement of the amount after dividing the total amount owed by 72.
The IRS may ask you for further financial information, such as bank accounts, income, assets, and investments, to know if you have other income resources. They may advise selling some of your assets to clear your outstanding balance.
Your minimum payment for balances of $50,000 or more might be unique, depending on your agreement with the IRS.
How Can You Avoid a Tax Penalty for Underpayment?
The IRS encourages taxpayers to plan ahead and understand their options in paying taxes to avoid a tax penalty for underpayment. They also suggest the use of the online withholding calculator to allow taxpayers to know if they have any additional tax payments.
You can also increase your withholdings on your W-4 to withhold more from your paycheck if you are receiving a monthly salary. For those who are self-employed or have other types of income, like dividends, interest, capital gains, and prizes and awards, you may need to pay for an additional or estimated tax penalty.
The IRS also encourages everyone to perform a “paycheck checkup” to prevent an unexpected tax liability at the end of the year.
For high-earning people, if your adjusted gross income for the previous year is more than $150,000, filing jointly as a married couple, or more than $75,000, filing as a single filer, you have to pay 90% of the current year’s tax bill. Knowing this will help you monitor your tax payments to avoid penalties.
If it is your first time facing a tax penalty for underpayment, or other tax penalties, the IRS can provide some penalty relief. You will still have to deal with interest charges on unpaid taxes though.
Always keep track of your taxes and pay the right estimated taxes, file your 1040 on time, and pay the taxes due.
Want to learn more about paying a tax penalty for underpayment? Watch the video below from Knowledge Platter!
Instead of avoiding taxes for fear of owing more money, you must always file as soon as possible. Even if you do not have the money to pay at the moment, start paying as much as you can to minimize your fees.
If you do have to pay a tax penalty for underpayment, do not procrastinate. Begin the process of paying them back today.
Do you have experience with paying a tax penalty for underpayment? What challenges did you face and how did you deal with them? Share your experiences in the comments section below.
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Editor’s Note: This post was originally published on Apr 19, 2018, and has been updated for quality and relevancy.