IRS Underpayment Penalty Rises To 8% – Nearly Three Times As Much As Two Years Ago

News

By Jesse O’Neill

Published December 3, 2023, 2:08 pm ET

The Internal Revenue Service’s penalty for tax underpayments has nearly tripled since 2021, putting gig economy workers and consultants at greatest risk of having to hand over big money to Uncle Sam.

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

The penalties are largely imposed on pay-as-you-go workers who have no taxes withheld and fail to make estimated quarterly payments before filing their taxes in April.

Employees who have taxes withheld would still be affected by the new higher penalty if they do not accurately calculate and pay taxes on their additional income, as would individuals who receive higher-than-expected dividend payments.

Karla Dennis, a registered agent in La Palma, California, said taxpayers who change their withholding to get more cash each week could also find themselves in trouble.

Since 2021, the penalty for tax underpayment has tripled. Getty Images

“It’s a cascading problem: They have to set up a payment plan and budget so they don’t end up in this situation again,” she said.

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

The penalties can be avoided by paying at least 90% of the tax debt before filing, or the difference is less than $1,000 – whichever is greater, according to the IRS.

You can avoid penalties by paying at least 90% of your tax bill before filing your tax return. Getty Images

Taxpayers who pay 100% of the prior year’s tax liability would also be spared – a number that increases to 110% for those earning more than $150,000 or married taxpayers filing separately and earning at least $75,000. Earn dollars.

“It is a cautionary tale that everyone should reflect on as we approach the end of the year. Are you where you should be?” Joseph Doerrer, a CPA and certified financial planner at Mezzasalma CPAs in Tinton Falls, New Jersey, told the Journal.

Sameet Durg, a marketing executive from Warren, New Jersey, learned about the fines the hard way after he owed a four-figure underpayment penalty on top of an already hefty tax bill for simply failing to make estimated payments.

“Now I pay attention to taxes all year round. I don’t want the giant to strike in April,” Durg, a Doerrer customer, told the newspaper.

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