@km2438 wrote:
also, my sister owed underpayment penalty even though she owed the IRS less than $1,000 of taxes, so the rule didn't apply. why?
You can owe an underpayment penalty if your tax payments in a given quarter don't match your income in that quarter, even if you catch up by the end of the year. Another situation is if you have a lump sum at the end of the year and make a lump sum payment, the IRS will assume the tax payments should have been spread out over the whole year, so that you would be considered underpaid in the first 3 quarters even if you paid the correct amount in the final quarter.
One way to address this is to run the penalty interview in Turbotax—which is always available but doesn't always automatically prompt—and use the "annualized method." This shows the IRS that while your income may have been "lumpy", your payments in each quarter were appropriate for the income in that quarter.
Another way to address this is to have tax withheld from any lump sum income, such as CD interest, because then the IRS assumes that both the income and withholding was spread out over the whole year. (The term "backup withholding" is technically something different, you can just ask for regular withholding, most banks should do that. Depending on your other income, 12%-32% should be enough for most people, and if you have too much withheld, you will get the difference back as a refund.
