If you receive a notice indicating that you underpaid your taxes, it means the IRS has determined your reported tax liability was incorrect. It could be due to an error, missing income, or miscalculation. In that case, you may owe additional tax, plus interest and possibly penalties for the underpayment.
Your first reaction might be to panic a little, but there’s no need to stress. Follow this quick guide instead.
Know What the IRS Is Allowed to Charge You
Before you take any action, figure out what the IRS is charging you for and how. If you have allegedly underpaid, the three types of charges you might incur from the IRS are:
- Interest: The IRS charges underpayment interest on unpaid taxes, beginning on the original due date of the return and continuing until you pay the balance in full.
- Penalties: If the underpayment stems from negligence, disregard of rules, or a substantial understatement of income, you could face an “accuracy-related penalty” equal to 20% of the underpaid amount.
- Estimated-tax penalties (if applicable): If you failed to pay enough tax during the year—for example, by not withholding enough or missing quarterly estimated tax payments—you may be subject to underpayment penalties under the “pay-as-you-go” rules.
What You Can (and Should) Do Right Away
Follow these steps as soon as you get an IRS notice about alleged underpayment:
- Carefully review the IRS notice. Compare what the IRS says you owe with your own records, income statements, and prior filings. Sometimes a notice is due to incomplete or mismatched 1099/W-2 information.
- If you agree with the IRS calculation, pay the balance promptly. Paying as soon as possible stops further interest and penalties from accruing.
- If you disagree or believe there’s an error, respond. Often, the notice explains how to appeal or request reconsideration. Provide documentation that supports your position.
- If the underpayment resulted from “reasonable cause” (unexpected events, misinformation, etc.), you may request penalties to be abated. The IRS sometimes grants relief if you demonstrate good faith or reasonable circumstances.
Get Help from a Tax Attorney
An IRS underpayment notice doesn’t always mean disaster, but it does require swift and informed action. If you need help responding effectively, whether that means requesting an abatement, filing a formal appeal, or simply reviewing your tax history, reach out to Gabaie & Associates, LLC for expert guidance.
We help taxpayers in Baltimore, Columbia, Frederick, Rockville, and throughout Maryland with complex tax issues, and we’re ready to assist you. Call (410) 358-1500 or fill out our consultation form to get started.
