Underpayment Penalty Law and Legal Definition

Underpayment penalty is a tax penalty enacted on an individual for not paying enough of his/her total estimated tax and withholding. If a person has an underpayment of estimated tax, he/she must have to remit a penalty on Form 2210. A taxpayer can avoid underpayment penalties by paying the either 100% of previous year's tax or 90% of current assessment year's tax in combined estimated and withholding tax payments.

The underpayment penalty is a fixed amount of interest, ranging from 4 to 10 percent, additional to the total amount owed to the Internal Revenue Service (IRS). Generally, the Internal Revenue Service serves 90 days intimation to the faulty taxpayer and he/she must have to respond with in the stipulated time before the penalty is assessed.