Adding to VolvoGirl's explanation, underpayments are calculated for each tax quarter of the year. An estimated tax payment made late in the year will not eliminate any penalty for underpayment during the earlier quarters of the year. As VolvoGirl mentioned, if a large portion of your income occurred late in the year, annualizing income on Form 2210AI will likely reduce or eliminate the penalty. However, if a large portion of your income occurred early in the year, annualizing is likely to increase your penalty.
