26 U.S.C. § 6654 — Failure by individual to pay estimated income tax

This section adds a penalty when an individual underpays their estimated taxes during the year. (a) Addition to the tax. Unless another part of this section says otherwise, if an individual underpays their estimated tax, a penalty is added to their income tax, self-employment tax, and Additional Medicare Tax. It's figured by taking the interest rate set under section 6621, applying it to the underpaid amount, for however long the underpayment lasted. (b) Amount and period of underpayment. (1) For any installment, the underpayment is the required installment amount minus whatever was actually paid by its due date. (2) The underpayment period runs from that due date until the earlier of the 15th day of the 4th month after the tax year ends, or the date that part gets paid. (3) Any estimated payment made is applied to the earliest unpaid required installment first. (c) Number and due dates of installments. (1) There are 4 required installments each year. (2) They're due April 15, June 15, September 15, and January 15 of the following year. (d) Amount of each required installment. (1)(A) Except as (2) allows a lower amount, each installment is 25% of the "required annual payment." (B) That required annual payment is whichever is smaller: 90% of the tax shown on this year's return (or 90% of the actual tax, if none was filed), or 100% of the tax shown on last year's return — though the 100% option doesn't apply if last year wasn't a full 12-month tax year, or no return was filed for it. (C) If last year's adjusted gross income was over $150,000 ($75,000 for a married person filing separately), that 100% figure becomes 110% instead. For an estate or trust, adjusted gross income is figured under section 67(e). (2)(A) If a taxpayer shows their "annualized income installment" for a given installment is smaller than the regular amount, they only owe the smaller, annualized figure — but the savings gets added back into later installments until fully recaptured. (B) The annualized income installment is found by projecting out (annualizing) the taxpayer's income for the months of the year before that installment's due date, applying the applicable percentage, then subtracting whatever earlier installments already required. (C) The Secretary writes the annualization regulations; the applicable percentages are 22.5% for the 1st installment, 45% for the 2nd, 67.5% for the 3rd, and 90% for the 4th; and "adjusted self-employment income" is self-employment income figured the same annualized way. (D) Certain foreign-corporation income a taxpayer must report ("subpart F income") gets folded into the annualized calculation like partnership income — unless the taxpayer elects a "prior year safe harbor," treating that income as received evenly through the year, in the amount shown on last year's (or the year before's) return. (e) Exceptions — no penalty applies if: (1) the tax shown on this year's return, minus the withholding credit, is under $1,000; (2) last year was a full 12-month year, the taxpayer owed no tax that year, and was a U.S. citizen or resident the whole year; or (3) the Secretary decides that a casualty, disaster, or other unusual circumstance makes the penalty unfair, or that the taxpayer retired after turning 62 or became disabled in the relevant year and the underpayment was for reasonable cause, not willful neglect. (f) What counts as "tax" here: the income tax under chapter 1 (not counting certain increases), plus the self-employment tax under chapter 2, plus the Additional Medicare Tax under chapter 2A, minus other tax credits — but not the wage-withholding credit, which is handled separately. (g) Withholding treatment. Wage withholding is treated as estimated tax paid in four equal chunks, one per due date, unless the taxpayer proves the actual withholding dates, in which case it counts as paid then. This can be applied separately to regular wage withholding versus other withheld amounts. (h) Filing early. If the taxpayer files their return and pays everything owed by January 31 of the next year, no penalty applies to the 4th installment. (i) Farmers and fishermen. A qualifying farmer or fisherman only owes 1 installment, due January 15 of the next year, equal to the required annual payment recalculated using 66⅔% instead of 90% (skipping the higher-income rule); the January 31 filing deadline in (h) becomes March 1 for them. Someone qualifies if at least 66⅔% of their gross income this year — or on last year's return — came from farming or fishing, including oyster farming. (j) Nonresident aliens. Covered nonresident aliens owe only 3 installments, due June 15, September 15, and January 15 of the next year; the first is 50% of the required annual payment instead of 25%, and the annualized-installment percentages are 22.5%, 45%, 67.5%, and 90%. (k) Fiscal years and short years. For a tax year not starting January 1, the months in this section shift to match; for tax years under 12 months, the Secretary writes implementing regulations. (l) Estates and trusts. This section generally applies to them too, except it doesn't apply — for up to 2 years after death — to the decedent's estate or to a trust that was entirely treated as the decedent's own and that the estate's residue passes into (or that's mainly responsible for paying the estate's debts and expenses). It also doesn't apply to a charitable trust taxed under section 511 or a private foundation. For estates and trusts it does cover, the annualization window ends one month before an installment's due date instead of on it. (m) Medicare tax. The extra 0.9% Medicare tax under section 3101(b)(2), to the extent not withheld, counts as a chapter 2 tax here. (n) Regulations. The Secretary must write whatever regulations are needed to carry this section out.