Identify at-risk clients early and reduce surprises
Underpayment penalties aren’t just a tax issue—they’re a client experience issue. When clients receive an IRS notice, it creates stress, extra work, and often an urgent call to your office. The good news is that many of these penalties are preventable with a proactive approach.
Here’s how to identify clients at risk for 2026 estimated tax underpayment penalties—and what to do about it.
Start with Safe Harbor Protection
Safe harbor rules are the foundation of penalty prevention. Clients can generally avoid penalties if they pay:
- 100% of prior-year tax (110% for higher-income taxpayers), or
- 90% of current-year tax liability
Review prior-year returns, calculate the correct threshold, and compare it to current-year payments. Remember—safe harbor is based on total annual payments, not just Q1.
Monitor Income Changes
Significant income changes are one of the biggest drivers of underpayment risk. Business growth, asset sales, capital gains, Roth conversions, and irregular income can all increase tax liability.
When these events occur, update projections early and adjust estimated payments accordingly.
Watch for Non-Withheld Income
Clients with income that isn’t subject to withholding—such as self-employment, K-1s, rentals, investments, or gig work—are more likely to underpay.
For these clients, regularly evaluate whether current payments are enough to cover projected tax liability.
Use Withholding Strategically
Withholding can be a powerful planning tool. Because it’s treated as paid evenly throughout the year, increasing withholding later can help reduce or eliminate penalties.
Review payroll withholding, W-4 elections, and spousal strategies to close any gaps.
Identify High-Risk Clients
Some clients need more proactive attention—especially those who:
- Owed more than $1,000 last year
- Paid penalties previously
- Have uneven income or missed deadlines
- Recently experienced major life or income changes
Early outreach can make a significant difference.
Plan and Communicate Early
Project tax liability, determine the appropriate payment method, and confirm federal and state requirements. Just as important—communicate clearly with clients. Send reminders, provide instructions, and schedule follow-ups to ensure they stay on track.
Firms that consistently monitor safe harbor status, income changes, and withholding gaps can reduce penalties, improve client relationships, and minimize filing-season stress.
Underpayment penalties are common—but with the right approach, they’re often avoidable.
To learn more about how Drake Software can help you avoid underpayment penalties, sign up for a free trial or contact our sales team at (888) 544-8993.
Disclaimer: This article is for informational purposes only and not legal or financial advice.
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