Sunday, April 17, 2011

IRS Penalty for underpayment

So, one day before paying my taxes, I realized I had to pay a bit more than expected and afraid of penalties, I checked the rules. Quite frigging cryptic the first time you read them, but here is an example for future reference. Say that your tax withholding (what you had paid so far in taxes) was $8000 but that what you should have paid was $10000. The IRS wants you to pay penalty if you make a mistake by "too much".
  1. The first cut is an absolute number. Basically, something that says "don't worry if you just underpaid by this much...". And that limit is set at $1000. So, with an underpayment of $2000, we are way past that.
  2. The 2nd is if you should have imagined that you had to pay more than you paid. I.e., with what you had made, should you have realized that your error was too big... For that there are 2 cuts:
    1. The first is very similar to the "first cut" but instead of absolute quantity, it's a relative. Here they are saying: "if you paid in a range of 90% of what you were supposed to pay, you are fine". 8k is less than than 90% of 10k (9k), so, we can't say that we are fine... The error is considered "too big" by the IRS
    2. The second is saying "you even paid less than what you paid in 2009 moron!". So, say that you paid in 2009 $9500 of taxes (check line 60 of the 1040). This year you paid only $8k. I think you got no excuse. But if last year you had paid only $7k of taxes, then you would be fine. In other words, if you pay in withholdings along the year more than the total tax you paid the previous year, you are fine. You got an "excuse" :)
More examples/explanation here:

Disclaimer: I have no clue about tax reporting. Follow the above at your own risk. Just trying to help :)

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