2010 Tax Underpayment Penalty

The problem of underpaying taxes is significant because of the penalties imposed by the IRS. If estimated tax payments are requires and not paid, additional penalties may apply and can be significant. In 2010, underpaying taxes will cause the taxpayer to have to pay the federal short term interest rate plus 3%. The federal short term rate is set quarterly – for Q1 of 2010, the rate is 4%. So, the penalty for underpaying taxes in 2010 is a 4% penalty plus the 3% penalty on the tax owed, and the penalties are compounded daily.

Estimated Tax Payments

The general rule is that estimated tax payments are required for 2010 if both of the following “Key Questions” are applicable:

1. You anticipate owing at least $1,000 (after withholdings and refundable credits are applied)
   
   
2. The anticipated withholdings and refundable credits will be less than the smaller of:
   
   
   • 90% of the reported taxes on the 2010 income tax return, or
   • 100% of the tax that was shown on the 2009 tax return, provided the 2009 return covers 12 months.

Calculating Estimated Tax and Witholdings

To understand how to use your own tax information to answer the “Key Questions”, consider the following data for “Taxpayer Joe”:

• Joe expected 2010 adjusted gross income (AGI) = $72,000
• Joe’s 2009 AGI = $63,000
• Joe’s 2009 total tax paid in 2009 = $9,400
• Joe’s total 2010 estimated tax = $11,600
• Joe’s 2010 expected withholdings = $10,550

Based on Joe’s numbers above, the answers to the “Key Questions” are:

• (1.a.) Joe expects to owe more than $1,000 in 2010
  • ($11,600 - $10,550 = $1,050)

• (2.a.) Joe expects his tax withholding ($10,550) to be at least 90% of tax shown on his 2010 return
  • ($11,600 x 90% = $10,440).

• Since Joe expects to withhold more than $10,440, he is not required to pay estimated taxes for 2010.

Tax Payment Timeline and Due Dates

If estimated tax payments are required the timeline and due dates are:

Help from a Tax Attorney for Underpaying Tax Penalties

Tax issues can be very complicated and hard to understand, and seeking legal help can help you understand your liabilities, payment options, and how tax penalties are calculated. Planning taxes in advance with a tax attorney can save valuable time and money and avoid penalties in the future.