Here's a breakdown on the different penalties that the IRS may access, including those for late payments and underpayments:
1. Late Payment Penalty (also known as Failure-to-Pay Penalty)
- What it is: This penalty applies when you file your tax return on time but don't pay the full amount of taxes owed by the tax deadline (typically April 15th).
- How it's calculated: The penalty is 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid, up to a maximum of 25% of the unpaid tax.
2. Underpayment Penalty (also known as Estimated Tax Penalty for individuals)
- What it is: This penalty applies when you don't pay enough taxes throughout the year, either through withholding from your paycheck or by making estimated tax payments.
- Who it affects: This penalty typically affects self-employed individuals, small business owners, and those who have significant income not subject to withholding.
- How to avoid it: In general, you can avoid this penalty by paying at least 90% of the tax shown on your current year's return, or 100% of the tax shown on your prior year's return, whichever is less. Other circumstances may apply based on the tax liability/high income levels.
- Penalty Calculation: The penalty is calculated by multiplying the underpaid amount for each quarter by the interest rate for that quarter.
The IRS will notify you of a penalty through a written notice or letter that includes all relevant details about the penalty, how to pay it, and your options for disputing or seeking relief. Based on the type of penalty will be the year it is due/calculated. Here is a link for further details: IRS Penalties
As far as your inquiry regarding a penalty "incurred in the 2025 tax year - does that then show up in 2026 (when filing 2025 taxes)" that will be via written notice not part of the following years tax return.
Have an amazing day. Evelyn M (CPA 20+ years)
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