OT: Why do underpayment penalties exist?

[CC_Lemming]

So I just finished my taxes this weekend (procrastinator, I know). I have a rental property and some other sources of income for which taxes are not withheld, so my wife and I have owed quite a bit in recent years. Wasn't surprised by that in the least, but for the first time I noticed my software was figuring in an underpayment penalty since the amount I owed was (well) over 1k for both state and federal.

It didn't blow my gasket or anything, it was a modest $20 all told, but why the hell does an underpayment penalty exist? The state and federal government are getting the money regardless. I take it has something to do with getting money earlier or throughout the year that matters, but I couldn't find anything on the rationale behind the penalty, only explanations of when it comes into effect. Thoughts?

I just redid my W4 for work to avoid the larger payments next year at this time, so it shouldn't be an issue in the future.

 

[Husker.Wed.]

I assume it is because the tax you have to pay in 2015 should be paid in 2015, not as a lump sum in three and a half months into 2016. That is why they want you to set up quarterly payments in the year the tax is due if expected income from sources other than normal employment will cause a big tax due bill at the end of the year. I assume further that the reason why they do this is if the government does not have enough money to make it through the year, they have to borrow it and pay interest. Your penalty for not paying enough in 2015 helps with paying that interest and the hassle of having to issue T-Bills.

 

[TheLiberalHunter]

I would imagine it is tied to the "other sources of income with no tax withheld". I have a number of rentals and no Quarterlies are due. If it is some sort of self employment shown on Schedule C then I could understand. If the other sources are some form of 1099 then I don't see where that would apply as I get some of that as well and nothing is due until I file.

 

[TheLiberalHunter]

Google has your answer. If u OWE less than 1000 or if your YTD tax payments are at least 90% of what is owed then u avoid that penalty. I.earned something new today!

 

[CC_Lemming]

I assume it is because the tax you have to pay in 2015 should be paid in 2015, not as a lump sum in three and a half months into 2016. That is why they want you to set up quarterly payments in the year the tax is due if expected income from sources other than normal employment will cause a big tax due bill at the end of the year. I assume further that the reason why they do this is if the government does not have enough money to make it through the year, they have to borrow it and pay interest. Your penalty for not paying enough in 2015 helps with paying that interest and the hassle of having to issue T-Bills.

Ahh, makes sense! I was having trouble coming up with why the timing was relevant, and you put it very well.

 

[CC_Lemming]

Google has your answer. If u OWE less than 1000 or if your YTD tax payments are at least 90% of what is owed then u avoid that penalty. I.earned something new today!

I understand why it happened, just not the justification. But what Husker.Wed. said made a lot of sense and satisfied my curiosity.