There may be some truth to the stories that some corporations operating in the tax preparation arena tell, namely that, when taxpayers do their own returns, they end up leaving $1 billion on the table. The flip side of that coin is that when taxpayers prepare their own returns, it may cost them money in the form of interest and penalties on unpaid taxes. Thus, there's an assumption that deep down, a lot of Americans aren't sure if they have filed their returns correctly. Hence, IRS Form 2210.
The IRS imposes a tax penalty on a taxpayer if that person or business fails to pay their tax liability or estimated tax and withholding in full, or if the taxpayer submits a late payment. While the IRS calculates interest and penalties, the taxpayer can use Form 2210 to calculate the amount for themselves.
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Function of an Underpayment Penalty
The U.S. tax system operates as a "pay as you go"system, so you are required to have taxes withheld or pay estimated taxes during the tax year. If a taxpayer pays 100 percent of the prior year's tax liability, or 90 percent of the liability for the forthcoming tax year, they will not incur an underpayment penalty.
The underpayment penalty is imposed if a taxpayer fails to pay the estimated tax in full or doesn't make regular payments throughout the year, resulting in an underpayment of owed taxes.
Amount of the Underpayment Penalty
The dollar value of the underpayment penalty is based on the taxes an individual owes and the amount of time that's elapsed between when the estimated tax was due and the date on which the payment was made. In most cases, an underpayment penalty is about 0.05 percent of the taxpayer's underpayment per month or a portion thereof during which the tax is due.
The agency imposes interest on unpaid tax and adds an underpayment penalty, which is capped at 35 percent. The underpayment interest comes into play whether or not you file for an extension. In turn, the agency pays interest on tax overpayments.
What Is the Amount of Interest Payment?
Both tax underpayments and overpayments accrue interest. The interest rate equals the federal short-term rate, plus 3 percentage points. The IRS determines the interest rate each quarter.
Read more: Interest and Payments on Amended Tax Returns
What Is Form 2210?
The IRS calculates your underpayment penalty so, typically, there is no need to file IRS Form 2210. If you prefer to calculate the penalty yourself, the IRS provides Form 2210 so you can calculate the amount owed, net of taxes paid during a current tax year. If the calculation demonstrates that the taxpayer has underpaid their tax liability, they must submit the amount due.
Once you calculate the taxes due, submit Form 2210 with Form 1040 to the IRS. You may also submit Form 2210 to request a penalty waiver.
Read more: Penalties for a Mistake on Federal Taxes
Underpayment Penalty Exceptions
The IRS may waive an underpayment penalty in certain situations:
- Taxpayer's tax liability is less than $1,000.
- Taxpayer's liability relates to the current tax year, rather than to a past one.
- Taxpayer owes 10 percent or less of annual tax liability.
- A casualty event, disaster or other unusual circumstance led to the underpayment.
- Taxpayer retired after reaching age 62.
- Taxpayer became disabled during the tax year in which the underpayment penalty applies.
- Underpayment was the result of a reasonable cause rather than due to willful neglect.
A taxpayer avoids an underpayment penalty by paying 100 percent of the prior year's tax liability or 90 percent of the current year's tax liability.