The substantial underpayment penalty applies if you underpay your taxes by the higher of 10% of the amount you should have paid, or $5,000. Example: Phil files Form 1040 showing a total tax due of $4,000. The IRS audits his return and determines he should have paid $10,000.
What is considered a substantial underpayment of tax?
You understate your tax if the tax shown on your return is less than the correct tax. The understatement is substantial if it is more than the larger of 10 percent of the correct tax or $5,000 for individuals. A reasonable basis is one that has approximately 10 percent or greater chance of success if challenged.
How does the IRS calculate penalty for underpayment?
Tax preparation software typically calculates this penalty on Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. If the penalty is not paid with the return, the IRS will later send a notice to the taxpayer assessing it.
How does the IRS calculate the estimated tax penalty?
When they do not, the IRS may impose the estimated tax penalty, commonly referred to as the underpayment penalty. Tax preparation software typically calculates this penalty on Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
Can a first time penalty be abated by the IRS?
Some practitioners have even seen Appeals remove penalties based on first-time penalty abatement criteria, even if the taxpayer did not exactly meet the criteria. Estimated Tax Penalty (Sec. 6654) Individual taxpayers must adequately withhold from their wages and/or pay estimated tax payments evenly throughout the year.
Can a payment be credited to the wrong year?
It is fairly common for the IRS to credit a payment to the wrong tax period, causing an estimated tax penalty. Simply getting the IRS to move a payment to the correct year/period can save a client from paying this penalty.
