Underpayment Penalty

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Underpayment Penalty

Underpayment Penalty means:
a penalty that is assessed if total withholding and estimated tax payments are less than 90% of current-year actual tax liability. The rate is pegged to the federal short-term rate in effect during the third month following the tax year of underpayment. In 1993, it ranged from 7% to 8%.

Description and Definition of Underpayment Penalty

A penalty for not paying enough estimated tax and/or not having enough tax withheld. Underpayment penalties can be avoided by paying the either 100 percent of last year's tax or 90 percent of this year's tax in combined estimated and withholding tax payments.

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