The average estimated-tax penalty in fiscal-year 2023 climbed to about $500 from about $150 in 2022, according to Internal Revenue Service data. Meanwhile the number of affected tax filers rose to 14 million from 12 million. Overall, the agency assessed $7 billion in estimated-tax penalties in 2023, nearly four times the $1.8 billion it assessed in 2022. ...
Filers who don’t pay in enough tax throughout the year owe a penalty in the form of an interest charge on their underpayment that’s set quarterly. In 2021, the year that prompted most of the 2022 assessments, the IRS’s rate on underpayments was a rock-bottom 3%. The penalty is based on the short-term Treasury rate plus three points, and it climbed to 6% as rates rose in 2022. That pushed up charges on underpayments assessed the next year.
In 2023 the rate rose to 8% for the fourth quarter. It’s still there–so underpayment penalties will continue to sting taxpayers who owe them. ...
The IRS’s computers can impose undeserved penalties on some estimated-tax filers, because they automatically treat income as though it’s earned equally throughout the year. So if a filer does a fourth-quarter Roth IRA conversion and pays tax on it at that time, the system will assume the income was earned all through the year but the tax was only paid in the fourth quarter.
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