Written by Dean Moser

The IRS system is set up as a pay-as-you-go voluntary system. What if you volunteer not to withhold and agree to pay your taxes as you file your return? One possible reason would be that your business or investments can possibly provide a better return than the penalties imposed by not paying quarterly. Therefore, we need to consider what the cost of this type of action may be. 

If you owe less than $1,000 in tax there is no penalty, for higher amounts the penalty may be 0.5% with added interest of 7% in 2026 (this interest rate is adjusted quarterly).  This activity will generate a “red flag” in the IRS database and cause it to be reviewed.  The result of that review may be a letter generated by the IRS identifying the underpayment of tax penalty for your account, which will be at least 0.5% and may be up to 25%. You have the opportunity to respond and request relief if there were mitigating factors that made the prior payment impossible.

To use this as a strategy and course of business may be unwise, as the intent of holding back voluntary payments may be judged by the IRS as inappropriate and warrant the maximum fee of 25% plus the 7% interest.  The strategy may be worth it only if you have the business or investment returns annually to cover that 32% cost in any market.  Generally, not withholding can be an expensive idea, pay-as-you-go is the regulated expectation and the best course for most people.