IRS underpayment penalty soars to 8%

IRS underpayment penalty soars to 8%

The Internal Revenue Service penalty for tax underpayments has nearly tripled since 2021, putting gig economy workers and consultants at the largest risk of having to cough up big bucks to Uncle Sam.

As of Oct. 1, the IRS will now charge 8% interest on estimated tax underpayments, up from 3% two years ago, according to The Wall Street Journal.

The penalties are largely applied to pay-as-you-go workers who do not have taxes withheld and fail to make estimated quarterly payments before filing their taxes in April.

Workers who do have taxes withheld would still be hit with the new higher penalty if they don’t accurately calculate and pay taxes on any additional income, as would people earning higher-than-expected dividend payments.

Karla Dennis, a La Palma, Calif., enrolled agent, said taxpayers who change their withholding to get more weekly cash could also run into trouble.

"Izmir, Turkey - June 12, 2012: Close up to IRS( Internal Revenue Service) website through a magnifying glass on the laptop. IRS is a United States government agency tasked with collecting yearly state and income tax from working residents and businesses."
Since 2021, the penalty for underpayment on taxes has tripled. Getty Images

“It’s a cascading problem: getting them on a payment plan, setting up a budget so they don’t get into that situation again,” she said.

The increased penalty came after the IRS collected $1.8 billion in underpayment penalties from some 12.2 million Americans in fiscal year 2022, the paper reported.

The fines can be avoided by paying at least 90% of one’s tax bill before filing, or having less than a $1,000 difference — whichever sum is higher, according to the IRS.

Las Vegas, USA - January 19, 2016: A letter from the Internal Revenue Service or IRS. Photographed with a macro lens.
One can avoid fines by paying at least 90% of their tax bill before filing. Getty Images

Filers who pay 100% of the previous year’s tax bill would also be spared — a figure that rises to 110% for those who make more than $150,000 or married taxpayers who file separately and earn at least $75,000.

“It’s a cautionary tale for individuals to think about as we get toward year-end. Are you where you should be?” Joseph Doerrer, a CPA and certified financial planner at Mezzasalma CPAs in Tinton Falls, NJ, told the Journal.

Sameet Durg, a Warren, NJ marketing executive, learned about the fines the hard way after owing an four-figure underpayment penalty on top of an already large tax bill because he simply failed to make any estimated payments.

“Now I pay attention to taxes all year around. I don’t want the giant hit in April,” Durg, a client of Doerrer, told the paper.

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