Why did I get a notice about additional taxes owed after filing my return and paying the taxes due?
The U.S. income tax system is based on a “pay-as-you-go” tax system, which means you're required to pay income tax as you earn/receive income during the year. This can be done either through withholdings, or by making estimated tax payments.
If you pay an insufficient amount of tax throughout the year, you may have to pay a penalty for underpayment of estimated tax. Generally, this penalty can be avoided with the IRS if you owe less than $1,000 in taxes with the filing of your return, or if you paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
In short, you received this letter because your employer withholdings and/or your quarterly estimated tax payments weren’t enough to cover the required taxes for the year, in order to avoid the penalty.
For this reason, at the time we send over draft returns for client review, we often include the following:
“FYI - for returns with tax amounts owed, the IRS and/or State may levy additional interest/penalties once reviewed”.
So if you paid the tax liability shown as being due (from your tax return filing) and still received this notice, it’s because the IRS and/or your state taxing authority is charging interest/penalties due to your withholding being short of taxes due.
To avoid this hit in the future, we’d suggest adjusting withholdings to be sure more taxes are taken throughout the year. You may also consider estimated tax payments if you’ll have non-withholding income outside of employment paychecks, which may result in your overall withholdings being short.
Feel free to contact us with questions on this, or any other tax topics...we’re here to help!