Estimated tax safe harbors (individuals)
No underpayment penalty applies if withholding plus estimated payments equal at least the lesser of:
- 90% of the current year's tax, or
- 100% of the prior year's tax — increased to 110% if prior-year AGI exceeded $150,000
EXAMPLE: Prior-year AGI was $200,000 and prior-year tax was $40,000. Current-year tax turns out to be $60,000. The safe harbor is the lesser of 90% × $60,000 = $54,000, or 110% × $40,000 = $44,000. Paying $44,000 in withholding and estimates avoids the penalty even though the actual liability is far higher.
Preparer penalties (IRC §6694)
| Position type | Standard to avoid penalty |
|---|---|
| Undisclosed position | Substantial authority (roughly 40% likelihood) |
| Disclosed position | Reasonable basis (roughly 20% likelihood) |
| Tax shelter / reportable transaction | More likely than not (>50%) |
§6694(a) applies to an unreasonable position — the greater of $1,000 or 50% of the income derived. §6694(b) applies to willful or reckless conduct — the greater of $5,000 or 75% of income derived.
IMPORTANT: The hierarchy of confidence levels, weakest to strongest: reasonable basis → substantial authority → more likely than not → should → will. Disclosure lowers the standard the preparer must meet, which is why Form 8275 disclosure matters.
Other preparer requirements
- Sign the return and include the PTIN
- Furnish a copy to the taxpayer
- Retain records for three years
- Exercise due diligence on refundable credits (EITC, CTC, AOTC) and head-of-household status — Form 8867