Many taxpayers assume they can settle up at tax time if they fall short on estimated payments.
The IRS does not treat underpayment casually. Penalties are calculated using specific formulas and interest rates that can grow quickly.
GOBankingRates spoke with Chad Cummings, certified public accountant (CPA) and tax attorney, about what happens when estimated taxes go unpaid and how the costs can escalate.
For You: IRS Federal Income Tax Brackets: How They Work and What They Mean in 2026
Read Next: 5 Low-Effort Ways To Make Passive Income (You Can Start This Week)
The IRS Charges a Penalty
Underpaying estimated taxes triggers a federal penalty, not just a bill due at filing time. Once a quarterly payment falls short, the IRS begins calculating what is owed.
“The IRS treats underpayment of estimated taxes as a loan you took from the federal government without permission,” Cummings said. “Form 2210 calculates the penalty on a quarter-by-quarter basis, not as a single annual figure.”
Check Out: Here’s the Minimum Income You Need To File Taxes in 2026 — by Age
Interest Is Added and Calculated Quarterly
After a shortfall occurs, the IRS applies interest to the unpaid balance. The rate is tied to federal benchmarks and can change with economic conditions.
“The IRS applies the federal short-term rate plus three percentage points to each quarterly shortfall for the number of days it remained unpaid,” Cummings said. “That rate sits around 7% currently.”
The balance begins accruing interest immediately.
The Costs Can Add Up Quickly
Even one missed payment can result in a sizable charge.
Cummings explained, for example, that a taxpayer who owes $40,000 in estimated taxes and paid zero could face a penalty exceeding $2,000 before ever filing the return.
That charge also comes on top of the original tax owed.
You Must Meet IRS Thresholds To Avoid It
The IRS allows taxpayers to avoid an underpayment penalty if they meet specific payment thresholds during the year. Missing those thresholds, even narrowly, can still trigger a charge.
“Two safe harbors exist and most taxpayers know only one,” Cummings said. “You avoid the penalty if you pay at least 90% of the current year’s tax liability or 100% of the prior year’s liability (110% if your AGI exceeded $150,000).”
Cummings said that clients who sold property early in the year or exercise stock options in the first quarter can lose that protection if they wait until April to address the tax impact. Filing status changes can also eliminate safe harbor eligibility if payment thresholds aren’t recalculated.
The Penalty Is Not Deductible
Underpayment penalties can’t be written off. They are not tax deductible and provide no financial benefit.
“You cannot write them off,” Cummings said. “Every dollar you pay in penalties is an after-tax dollar with zero economic return. They are always a sign of inadequate planning and are 100% avoidable.”
More From GoBankingRates
- 5 Tax Loopholes the Ultra-Wealthy Use That Most Americans Don't Know About
- I'm an Accountant: 6 'Big Beautiful Bill' Tax Changes That Will Benefit the Middle Class
- 6 Safe Accounts Proven to Grow Your Money Up to 13x Faster
- Warren Buffett: 10 Things Poor People Waste Money On
This article originally appeared on GOBankingRates.com: I’m a CPA: Here’s What Happens if You Underpay Estimated Taxes
