Do you pay estimated taxes? It’s possible to have an underpayment penalty even with a refund. The IRS and states follow the pay-as-you-go model, meaning your tax payments should match your tax liability over four “quarterly” periods.
How can you get an understatement penalty with a refund?
Supposed you sold a house on January 1 for a big profit but never paid tax until December 31. You’d have an underpayment penalty because you were supposed to pay the tax due on the sale in the first quarter, and not wait until the end of the year.
If you received your income unevenly, you can annualize your penalty by matching your income with your tax payments.
If you tell us what state you are working on, we can give you more guidance.
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