What Happens If You Pay the Wrong Amount of Taxes?

Taxpayers sometimes submit an incorrect amount to the Internal Revenue Service (IRS). This article explores the consequences of paying too little or too much tax, outlines methods for correcting errors, and delves into common reasons for discrepancies.

When You Pay Too Little

An underpayment occurs when a taxpayer fails to pay enough federal income tax through wage withholding or estimated tax payments. The IRS identifies these discrepancies. Taxpayers may receive a CP2000 notice, indicating a discrepancy between third-party reported income and their tax return. A notice of deficiency might also be issued.

Underpayments can result in penalties and interest charges. The underpayment penalty, under Internal Revenue Code Section 6654, applies if a taxpayer does not pay at least 90% of their tax liability through withholding or estimated payments. For the first quarter of 2025, the annual interest rate for underpayments is 7%. An accuracy-related penalty, under Internal Revenue Code Section 6662, can be imposed for a substantial understatement of income tax or negligence.

Interest accrues on any underpaid tax from the original due date until payment is received. Taxpayers have options to address outstanding balances, including direct payment through IRS Direct Pay or an installment agreement. An offer in compromise may also be available, allowing taxpayers to resolve their tax liability for a lower amount.

When You Pay Too Much

Taxpayers sometimes overpay their federal income tax. When an overpayment occurs, the IRS processes it as a tax refund.

Refunds are typically issued through direct deposit or via a paper check. Processing time varies; most e-filed returns receive refunds within 21 days, while paper-filed returns often take four to eight weeks. Taxpayers can also apply an overpayment to their estimated taxes for the following year instead of receiving a refund.

The IRS may pay interest on overpayments. Interest begins to accrue if the refund is not issued within 45 days after the return’s due date or filing date, whichever is later. For the first quarter of 2025, the annual interest rate paid by the IRS on overpayments to individuals is 7%.

How to Correct a Tax Error

Correcting a federal tax error involves identifying the discrepancy and submitting an amended return. Taxpayers might discover the need for correction due to reasons like receiving a corrected tax document (e.g., Form W-2 or 1099), realizing forgotten income, or identifying a missed deduction or credit. To amend, gather the original tax return, new income statements, and records supporting additional deductions or credits.

Form 1040-X is the primary form used to amend a U.S. Individual Income Tax Return. It requires reporting original amounts, corrected amounts, and the net change. Part III of Form 1040-X is for explaining the changes. Supporting documentation, like revised W-2s or receipts for new deductions, should be attached.

Form 1040-X is generally filed by mail. The mailing address depends on the taxpayer’s state. If the amended return results in additional tax due, payment should be submitted with Form 1040-X to avoid penalties and interest. Conversely, if the amendment leads to a refund, the IRS will process it after reviewing the corrected return.

Processing times for amended returns are longer than for original returns, often taking up to 16 weeks. Taxpayers can monitor the status of their amended return using the “Where’s My Amended Return?” online tool. This tool requires the taxpayer’s Social Security number, date of birth, and zip code.

Understanding Common Reasons for Discrepancies

Common scenarios lead to incorrect federal income tax payments. One frequent cause is incorrect tax withholding, stemming from an inaccurately completed Form W-4 or life changes. For instance, getting married, having a child, or taking a second job without adjusting W-4 elections can result in too much or too little tax withheld. The amount withheld directly impacts year-end tax liability.

Unreported income is another common reason for discrepancies. This often occurs with income not subject to standard W-2 reporting, such as freelance or gig economy earnings, or investment income not on a Form 1099. Even small amounts, if not properly included, can lead to an underpayment. Virtual currency transactions may also generate taxable income or capital gains inadvertently overlooked.

Errors in calculating or claiming deductions and credits also contribute to incorrect tax payments. Taxpayers might misinterpret eligibility rules for common deductions (e.g., student loan interest, IRA contributions) or credits (e.g., Child Tax Credit, education credits). These errors can result in overpayment if eligible items are missed, or underpayment if ineligible ones are claimed. Relying solely on software without understanding underlying tax principles can lead to miscalculations.

Selecting an incorrect filing status can impact a taxpayer’s liability, as each status has different standard deductions, tax brackets, and credit eligibility. A change in marital or dependent status not accurately reflected can lead to an incorrect tax calculation. Simple data entry mistakes, such as transposing numbers when inputting income or Social Security numbers, are also common clerical errors that can cause discrepancies.