Amount Owed

• In general, a taxpayer who has a tax deficit of $1,000 or more will owe an underpayment penalty. This means that the maximize amount that a taxpayer can owe without triggering the penalty is $999. For example, if a taxpayer's total tax obligation is $3,000 and he sent the IRS $1,000 through the tax year via wage withholding or other payments, the taxpayer has a tax deficit of $2,000. Unless this taxpayer qualifies for an exemption from the penalty, the taxpayer will owe a penalty on the $2,000.
  
  

Other Criteria

• Taxpayers who owe more than $1,000, but meet other criteria will not owe an underpayment penalty. If a taxpayer paid an amount of taxes equal to 90 percent of the total tax due, the taxpayer will not owe the underpayment penalty. For a taxpayer who earns at least two-thirds of her income from farming or fishing, she must only pay at least 66 2/3 percent of the total tax due to avoid the penalty. Also if the taxpayer paid an amount equal to or greater than 100 percent of the total tax due for the previous tax year, the taxpayer will not owe the penalty. If a person did not owe taxes in the previous year, the IRS will not assess an underpayment penalty.
  
  

Exemptions

• The tax code provides some exemptions for taxpayers that otherwise would owe the underpayment penalty. If a person retired or became disabled during the tax year or in the previous year or failed to make tax payments due to a natural disaster or other unusual circumstance, the IRS may also waive the penalty. A taxpayer who qualifies for an exemption under these circumstances must submit Form 2210 to request consideration for a waiver for the penalty.
  
  

Other Information

• As the tax code may change from year to year, it is important for taxpayers to stay informed about changes in the tax code regarding underpayment of taxes and other issues. As of the 2010 tax year, the underpayment penalty imposed by the IRS is 4 percent per year. In addition to IRS penalties, state and local governments that place an income tax on taxpayers may also impose penalties for underpayment of the income tax.