In case a customer has been levied with an underpayment penalty, they can meet Read this article one of two estimated tax-filing safe harbours: either pay taxes that are lesser of 90% of their present year’s tax liability or 100% of their previous year’s tax liability.
Majority of the taxpayers choose the previous year’s safe harbour as the payment on it is fixed while the 90% is considered a moving target.
Individuals with salaried jobs can also compensate for an estimated tax shortfall by simply raising their withholding there. Married couples receive an additional option and if they file their returns together, the withholding of a spouse will cover any scarcity of estimated taxes due on the untaxed income of the wife or husband.
Another great way to avoid tax penalties is to annualise your income. To do so, you will have to file Form 2210 and break down deductions and income by estimated tax period, demonstrating that payments were made in the established order.
If the customer received a sizeable income at the year’s end, it will only be counted for the fourth quarter, but annualising confirms that the customer had the right amount in the first three quarters and only required to pay the higher estimated amount in the final quarter.
Other Penalty Options including Interest:
The IRS could be lenient towards customers who have been hit with a tax penalty for the first time. In such cases, customers can make an abatement request and show the organisation that you have maintained a good tax-paying history and that you will be compliant with the payments conditions in the future. However, even if some penalty relief is granted by the IRS, interest charges will still be levied on unpaid taxes.
Since interest is statutory, it is not generally abated. For general non-filing and non-payment situations, the prevailing interest rate is 3%, and this rate is compounded quarterly and not annually, meaning that it can accrue quickly, similar to the tax penalties levied on non-filing and non-payment of taxes. Customers can avoid these tax penalties with ease by merely efiling income tax their Form 1040 on time.
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