What is the consequence of underpayment of estimated taxes?

Underpayment of estimated taxes leads to a penalty being applied for the deficiency in tax payments made throughout the year. The Internal Revenue Service (IRS) expects taxpayers to pay their tax liability as income is earned or received, typically through withholding or estimated tax payments.

When individuals or businesses do not pay enough in estimated taxes, the IRS calculates the penalty based on the amount underpaid during specific periods. The penalty serves as a deterrent to ensure that taxpayers remain compliant with their estimated tax obligations. It is important for taxpayers to accurately estimate their tax liability and make timely payments to avoid incurring these penalties.

The other choices are not consequences of underpayment. While a reduction in tax refunds may occur due to certain tax situations, it is not directly a consequence of underpayment. Increasing tax credits is unrelated to underpayment issues, and disqualification from filing taxes is not a consequence tied to underpayment of estimated taxes. Thus, the applicable response identifies the direct and significant consequence of underpayment, which is the imposition of penalties by the IRS.