Generally, most taxpayers will have paid enough tax to avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
http://www.groco.com/readingroom/tax_underpayment_penalties.aspx
The 90% of the current year's tax amount is a variable based on the income for the current year, and often that amount isn't determined until it is too late to adjust the prepayment amounts. The underpayment penalties are computed on a quarterly basis.
http://www.rdtax.com/35445/How-to-Avoid-or-Reduce-Underpayment-Penalties/
As you can imagine, a tax projection is based on a number of assumptions and can become very complex. Therefore, thankfully, there is a second rule: 1  Pay in 100% of your prior year Total Tax. 2  The percentage is increased to 110% if your Adjusted Gross Income exceeds $150,000 in the prior year.
http://www.groco.com/readingroom/tax_underpayment_penalties.aspx
If you do not pay your tax or you pay an insufficient amount of tax through withholding, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
https://www.irs.gov/taxtopics/tc306.html
We round it up to 100% of the current year tax because doing a tax projection is tricky business and based on weak assumptions. Therefore, we always leave the 10% safety zone to cover any errors in assumptions. 1  Pay in installments on a current basis under an annualized income installment method.
http://www.groco.com/readingroom/tax_underpayment_penalties.aspx
In this case, you really didn’t need to know that your 2009 tax will be $100,000 and do all that computational work. You just needed to know that your 2009 income spiked up over 2008, and that 100% of the prior year tax will keep you safe from penalties.
http://www.groco.com/readingroom/tax_underpayment_penalties.aspx
How to Avoid or Reduce Underpayment Penalties. 1  Payroll withholding for employees; 2  Pension withholding for retirees; and. 3  Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. 4  The first safe harbor is based on the tax owed in the current year. 5  The second safe harbor-and the one ...
http://www.rdtax.com/35445/How-to-Avoid-or-Reduce-Underpayment-Penalties/
Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method.
https://www.irs.gov/taxtopics/tc306.html
Topic 306 - Penalty for Underpayment of Estimated Tax. The United States income tax is a pay-as-you-go tax, which means that you must pay tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments.
https://www.irs.gov/taxtopics/tc306.html
For example: If your Total Tax for 2008 was $20,000 and you pay the I.R.S. $5,000 per quarter, no underpayment penalty will apply regardless of how much tax is due on April 15 th 2010 for the 2009 tax year. Let me say that differently. Let’s say your 2008 Total Tax was $10,000.
http://www.groco.com/readingroom/tax_underpayment_penalties.aspx
how to avoid penalty on federal income tax
To avoid the penalty on federal income tax, paid enough tax to avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percentage of the tax for the current year, or 100 percentage of the tax shown on the return for the prior year, whichever is smaller.