If you were drastically underpaid during the year, you could owe a significant penalty even though you pay in full when you file.
For example, suppose you are single with no dependents, self-employed and you expect to earn $100,000 over the course of the year. You would pay approximately $15,000 in self-employment tax and $17,000 in income tax. The tax system is supposed to be pay as you go, and if you don't have withholding, you are required to make estimated payments 4 times a year, due April 15, June 15, Sept 15 and January 15. In this example, you would owe $8000 per quarterly payment. If you failed to make the payment, you would owe interest and penalties on $8000 for April to June; $16,000 from June to September, $24,000 from September to January 15, and $32,000 from January 15 to whenever you finally paid, even if you paid in full when you filed. The penalty is 0.5% per month and the interest rate is a variable rate which is currently at 7% per year.
In that example, you would owe $1280 in penalties and $1433 in interest, even if you paid in full when you filed on April 15, 2023.
If we propose a simpler situation, where you have a job but your withholding was just wrong, and you owed $10,000 at tax time, you would owe interest and penalties on $2,500 back to the previous April, $2,500 back to June, and so on. That would result in $400 of penalties and $466 of interest.
You will need to review the notice and also consider your tax situation. Were you under-withheld or under-paid? Did you pay a lot to catch up at the end of the year?
You can try and contact the IRS for a more detailed explanation although their phone support is not awesome.
If you find you do owe a penalty for underpayment, you can ask for a waiver if this is your first time. Interest can be waived but it will be recalculated after the penalty is removed.
https://www.irs.gov/payments/penalty-relief-due-to-first-time-abate-or-other-administrative-waiver
