What Is the Underpayment Penalty Rate for 2022?

The U.S. tax system operates on a “pay-as-you-go” basis, meaning you are expected to pay income tax as you earn or receive it throughout the year. If you don’t pay enough tax through withholding or quarterly estimated payments, the Internal Revenue Service (IRS) may charge an underpayment penalty. This penalty is a recurring interest charge on the amount you should have paid by each quarterly deadline for the 2022 tax year.

The 2022 Underpayment Penalty Rate Explained

The penalty for underpaying taxes in 2022 was not a single, fixed annual percentage. Instead, the IRS applies an interest rate that can change each quarter. This rate is calculated by taking the federal short-term interest rate and adding three percentage points. This structure means that the penalty accrues at different rates depending on when the underpayment occurred and for how long the tax remained unpaid.

For the 2022 tax year, the underpayment interest rates were set on a quarterly basis:

• 3% for the first quarter, January 1 to March 31.
• 4% for the second quarter, April 1 to June 30.
• 5% for the third quarter, July 1 to September 30.
• 6% for the final quarter, October 1 to December 31.

How the Underpayment Penalty is Calculated

The underpayment penalty is triggered when two conditions are met: you owe $1,000 or more in tax when you file your return, and your payments during the year were less than your “required annual payment.” The IRS provides “safe harbor” rules that, if met, protect you from the penalty. These rules establish the minimum amount of tax you must pay during the year.

To meet the safe harbor provision, you must pay at least 90% of the tax you owe for the current year (2022) or 100% of the tax shown on your prior year’s (2021) return. There is a special rule for higher-income taxpayers; if your Adjusted Gross Income (AGI) on your 2021 return was more than $150,000 (or $75,000 if married filing separately), you must have paid 110% of your 2021 tax liability to satisfy the safe harbor.

Taxpayers use IRS Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to determine if they owe a penalty and to calculate its amount. The form guides you through comparing your total tax payments made each quarter against the amount you were required to pay.

Requesting a Penalty Waiver

The IRS has the authority to waive the underpayment penalty in specific situations where its imposition would be inequitable. A primary reason for a waiver is if the failure to pay was caused by a casualty, disaster, or other unusual circumstance. This provision is intended for taxpayers who faced significant, unforeseen events that directly prevented them from managing their tax obligations.

Another reason for a waiver applies to taxpayers who recently retired or became disabled. To qualify under this provision, the taxpayer must have retired after reaching age 62 or have become disabled during the 2022 tax year or the preceding year (2021). The underpayment must also be due to reasonable cause and not willful neglect.

To request a waiver, you must complete and file Form 2210 with your tax return. In Part II of the form, you will check a box indicating the reason for your waiver request. You must also attach a detailed statement explaining the circumstances that led to the underpayment and why you believe the penalty should be waived. This statement should provide a clear timeline and supporting documentation if available, such as records of a natural disaster or medical documentation.

Reporting and Paying the Penalty

Once you have determined that you owe an underpayment penalty and do not qualify for a waiver, there are two paths for reporting and paying it. The first option is to calculate the penalty yourself. Using Form 2210, you would complete the necessary calculations to arrive at the total penalty amount. This figure is then entered on the designated line of your Form 1040 and added to your overall tax liability for the year.

The second option is to let the IRS calculate the penalty for you. If you file your tax return owing more than $1,000 and have not met the safe harbor payment requirements, the IRS system will automatically assess the penalty. In this scenario, you do not need to file Form 2210. The IRS will send you a notice or bill for the penalty amount after your return has been processed.

If you receive a bill from the IRS for the underpayment penalty, it will specify the amount due and provide payment instructions. You can pay this amount online, by phone, or by mail. Choosing to have the IRS calculate the penalty can be simpler, but calculating it yourself provides certainty about the amount you owe at the time of filing.