The Internal Revenue Service (IRS) is intensifying its approach towards taxpayers who underpay their estimated taxes making a huge leap in penalties.

The IRS is increasing the interest penalty for underpayment to 8%, a significant rise from the 3% rate just two years prior. This change will take effect next spring. The penalty rate is now set at the federal short-term rate plus three points for non-corporate taxpayers.

Self-employed individuals and independent contractors, a staple of American business, will be most affected. These groups are required to make estimated tax payments quarterly if less than 90% of their taxes are withheld during regular pay periods.

They risk facing the underpayment penalty if their payments fall short of the IRS’s expectations. However, taxpayers with a balance due under $1,000 after credits and deductions are exempt from this penalty.

The new penalty rates are less likely to affect W-2 employees, who usually have taxes withheld from each paycheck, often resulting in a tax refund rather than an underpayment penalty.

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Joseph Doerrer, a CPA and financial planner, explained the importance of this issue, advising individuals to be vigilant about their tax status as the year ends as reported by Fox News.

“It’s a cautionary tale for individuals to think about as we get toward year-end,” he said. “Are you where you should be?”

He shared an example involving Sameet Durg, a marketing executive. Durg was caught off guard with a substantial underpayment penalty into the thousands along with a hefty tax bill in April, having not made periodic estimated tax payments on his consulting income.

Learning from this experience, Durg said, “Now I pay attention to taxes all year around,” Durg told the Journal. “I don’t want the giant hit in April.”

To aid taxpayers in managing their tax obligations, the IRS offers a tax-withholding estimator tool online.

This tool requires inputs from the previous year’s tax return and current financial information, like pay stubs and taxable income, to guide taxpayers in estimating their tax payments.

What is egregious in these higher penalty rates is the exemption of corporations. The federal government always seems to go small business owners, the self employed and independent contractors. It is just wrong.

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