Underpayment Penalty

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Definition of 'Underpayment Penalty'

An underpayment penalty is a fee charged by the Internal Revenue Service (IRS) when a taxpayer does not pay enough taxes throughout the year. The penalty is designed to encourage taxpayers to pay their taxes on time and in full.

The underpayment penalty is calculated as a percentage of the amount of tax that was underpaid. The percentage depends on the taxpayer's filing status and how much they underpaid. For example, the penalty for a single filer who underpaid $1,000 is 3% of the amount underpaid.

The underpayment penalty is also calculated on a daily basis. This means that the penalty increases the longer the taxpayer goes without paying their taxes. For example, if a taxpayer underpaid $1,000 and did not pay the penalty for 30 days, the penalty would increase to $30.

The underpayment penalty can be avoided by paying enough taxes throughout the year. Taxpayers can make estimated tax payments or they can increase the amount of tax withheld from their paychecks.

There are some exceptions to the underpayment penalty. For example, the penalty does not apply if the taxpayer's income is below a certain threshold. The penalty also does not apply if the taxpayer has a valid reason for not paying their taxes on time.

If you are concerned about the underpayment penalty, you should consult with a tax professional.

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