Underpayment Penalty

Underpayment Penalty

A penalty that a taxpayer must pay if he/she fails to pay enough in estimated taxes and withholding. In order to reduce the incentive for persons and companies to pay taxes late, the IRS has instituted an underpayment penalty. In order to avoid the underpayment penalty, one must either pay 100% of his/her tax liability for the previous year or 90% of the liability for the current year.
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You can avoid an underpayment penalty if all of your tax payments for the year--including withholding and tax credits--cover your ultimate tax bill, or at least go far enough that you come up short by less than $1,000.
California law currently has a 20 percent underpayment penalty for understatements in excess of $1 million, which in many cases results in taxpayers overpaying their taxes to avoid the underpayment penalty.
An estimated tax underpayment penalty may further increase the taxpayer's bottom-line shock.
Another section of the bill would limit the reasonable cause and good faith exception to the existing underpayment penalty for public corporations or corporations with gross receipts in excess of $100 million.
First, it would impose a strict liability underpayment penalty of 30 percent on transactions lacking economic substance.
First, the underpayment penalty g increases the benefits of tax evasion for a taxpayer with high income and a low prepayment because successful tax evasion evades both tax and the interest on the underpayment.
For calendar year 2001, this S corporation need only make estimated tax payments of $13,300 (2000 taxable income times 2001 tax rate) to qualify for the safe harbor and avoid an underpayment penalty.
The underpayment penalty will not apply if the taxpayer's total tax liability is less than $500 or he has paid in at least 90% of the current year's tax or he has paid in an amount equal to at least 100% of the prior year's tax if a return was filed for that year.
While owing taxes isn't necessarily a bad thing, taxpayers who ended up owing a considerable amount may want to adjust their withholdings so that they are paying more during the year and avoiding any underpayment penalty.
Any tax not paid during the year (either through federal income tax withholding from an employer or estimated tax payments) is subject to an underpayment penalty.
California law has a 20 percent underpayment penalty for understatements in excess of SI million which in many cases results in taxpayers to overpay their taxes to avoid the underpayment penalty.
In addition, the courts upheld a 20% substantial underpayment penalty under section 6662(a).