What Is IRS Notice CP161?

A CP161 notice means the IRS has calculated an underpayment of estimated tax penalty for you and is billing you for it. This notice is most commonly received by self-employed individuals, freelancers, business owners, and retirees who are required to make quarterly estimated tax payments throughout the year but didn't pay enough.

The underpayment penalty applies when you owe $1,000 or more in taxes after subtracting withholding and refundable credits, and you didn't pay enough in quarterly installments to meet one of the "safe harbor" thresholds: (1) 90% of the current year's tax liability, or (2) 100% of the prior year's tax liability (110% if your prior year AGI exceeded $150,000). The penalty is calculated on Form 2210 and is based on how much each quarterly payment was short and for how long.

If you receive a CP161 and agree with the penalty amount, simply pay it. The penalty can't be reduced by paying it faster — it was already fully calculated at the time your return was filed or the IRS calculated it. However, there are situations where the penalty can be waived: if the underpayment was due to casualty, disaster, or other unusual circumstances; if you retired after age 62 or became disabled in the tax year or prior year and the underpayment was due to reasonable cause; or if the amount owed meets certain exceptions. You can request a waiver by completing Form 2210 and attaching it to your return or responding to the CP161 by mail.

To avoid receiving another CP161 in future years, increase your estimated tax payments going forward. You can use the IRS's Tax Withholding Estimator at irs.gov to calculate how much you should be paying each quarter based on your expected income, deductions, and credits. If you receive irregular income (freelance, investments, business income), paying a bit more than the safe harbor amount each quarter provides a cushion against unexpected income spikes.