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Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 123501  
Subject: Re: Underpayment of estimated tax Date: 10/19/1999 6:03 PM
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I want to send IRS an additional $3800 before the Janaury tax is due to avoid some of the penalty.
What kind of a message should accompany the check?

That won't help. Underpayment penalty & interest is calculated per period (April 15, June 15, Sept 15, & Jan 18). If you had an underpayment for any period, then you owe penalty for that period. Paying more in a later period does not reduce nor cancel the penalty for the earlier period.

The second thing to note is that if you underpay in one period, you may owe penalty in subsequent periods even if you sent in the correct amount in the later periods. The reason is that any payment sent in is first applied to the previous underpayment, then what's left is applied to the current period. And since you only send in the "correct" amount, some of it will be applied to the previous period underpayment, thus leaving you with a lesser amount than required, hence triggering penalty for that period.

Your only chance to reduce the penalty is to annualize your income (a way of averaging your income). But this will only help you if most of your income is late in the year. For more detail, see IRA Publication 505.

The only way to avoid penalty to reach the "safe harbor" with withheld tax--this option only work if you worked for somebody who withhold tax for you. If you're truly self-employed, then you're out of luck.
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