how underpayment interest calculated?

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I finalized my federal tax return today 4/2/2023, and have under payment, TurboxTax calculated my interest penalty is $xxx, about 3% rate, why so high? how it is calculated?

DawnCAnswer

Employee Tax Expert

There are underpayment penalties and then there is also interest charged on the penalty.

The Underpayment of Estimated Tax by Individuals Penalty applies to individuals, estates, and trusts if you don't pay enough estimated tax (quarterly) on your income or you pay it late. The penalty may apply even if you are owed a refund.

They calculate the penalty based on:

The amount of the underpayment
The period when the underpayment was due and underpaid
The interest rate for underpayments that they publish quarterly

They charge interest on penalties. The date from which they begin to charge interest varies by the type of penalty. Interest increases the amount you owe until you pay your balance in full. For more information about the interest charged on penalties, see Interest

The law allows the IRS to waive the penalty if:

You didn't make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.

For more information, refer to Penalties and the Instructions for Form 2210.

Penalty Options in TurboTax

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DawnC

Answer

Employee Tax Expert

There are underpayment penalties and then there is also interest charged on the penalty.

They calculate the penalty based on:

The amount of the underpayment
The period when the underpayment was due and underpaid
The interest rate for underpayments that they publish quarterly

The law allows the IRS to waive the penalty if:

You didn't make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.

For more information, refer to Penalties and the Instructions for Form 2210.

Penalty Options in TurboTax

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

VolvoGirl

Level 15

You might be able to eliminate it or at least reduce it. You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you. It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

If you have the desktop program you can switch to Forms Mode (click forms in the upper right (left for Mac)) and open the 2210 form. If the 2210 doesn't show up in the left column, click on Open Forms at the top of the left column. Type 2210 in the search box and open the 2210 form. Check box C to let the IRS calculate it.

IRS form 2210

https://www.irs.gov/pub/irs-pdf/f2210.pdf

2210 Instructions

https://www.irs.gov/pub/irs-pdf/i2210.pdf