IRS Penalties - Underestimate and Late Payment Penalties

Underestimate and Late Payment Penalties

Taxpayers are required to have withholding of tax or make quarterly estimated tax payments before the end of the tax year. Since accurate estimation requires accurate prediction of the future, taxpayers may underestimate the amount due. The penalty for paying too little estimated tax or having too little tax withheld is computed like interest on the amount that should have been but was not paid. For 2009, this interest rate was 4%.

Where a taxpayer has filed an income or excise tax return that shows a balance due but does not pay that balance by the due date of the return (without extensions), a different charge applies. This charge has two components, first an interest charge, computed as described above, and second a penalty of 0.5% per month applied to the unpaid balance of tax and interest. The 0.5% penalty is capped at 25% of the total unpaid tax.

The underestimate penalty and interest on late payment are automatically assessed. No reasonable cause exception applies for these penalties.