Addition to Tax

The law imposes an addition to tax (i.e. penalty) in the case of an underpayment of any installment of estimated tax by an individual. The amount of the addition to tax with respect to any installment is computed by applying the "underpayment rate" to the "amount of the underpayment" of the estimated tax for the "period of underpayment." Like other penalties, this addition to tax is not deductible as an expense.

Amount of Underpayment

The "amount of the underpayment" of an installment of estimated tax is defined as the excess of the required installment over the amount, if any, of the installment paid on or before the due date for such installment.

Note: Because the amount of the underpayment is based on the amount required to avoid the penalty, an underpayment of $1 will result in a penalty based only on $1.

Period of Underpayment

The "period of the underpayment" of any portion of an installment of estimated tax runs from the due date of the installment to the earlier of the date on which such portion is paid, or the 15th day of the fourth month following the close of the taxable year.

Underpayment Rate

The penalty is computed at the interest rate for underpayments of tax. 

Although the rate is compounded daily for purposes of computing interest on tax deficiencies, it is not compounded for purposes of determining the addition to tax.

Relationship To Other Penalties

The penalty imposed for a failure to pay tax by the due date of the return (without regard to extensions) does not apply to the nonpayment of estimated tax.

Note: Payment of any unpaid estimated tax is not required to obtain an automatic four-month extension of time to file an individual income tax return. However, the taxpayer will be liable for penalties and interest on the underpayment of tax from the original due date of the return until the date the tax is paid.