Decoding IRS Letter 3354: Estimated Tax Reminder

What is IRS Letter 3354 and why is it important for you?

IRS Letter 3354 is an informational reminder the IRS mails to taxpayers about estimated tax payments. It usually lists upcoming quarterly due dates, reminds you of the risk of underpayment penalties, and points you to resources for calculating or submitting payments. In my 15+ years advising individuals and small-business owners, I’ve seen these letters arrive after a taxpayer’s income pattern changed—freelance income increased, investment income spiked, or withholding dropped after a job change. The letter’s goal is compliance: help you avoid penalties and surprises at filing time.

This article explains what to look for in Letter 3354, how to verify the notice, practical steps to respond, common mistakes to avoid, and where to get authoritative help.

What the letter usually contains

Most Letter 3354 mailings are short and clear. Typical elements include:

• Taxpayer name and last filing year the IRS used as a reference.
• A reminder that estimated tax payments may be required and the usual quarterly due dates.
• High-level guidance on how to pay (e.g., using Form 1040-ES vouchers, EFTPS, or IRS Direct Pay).
• A phone number or online links for more information.

The letter rarely contains a new calculation of taxes owed. Instead, think of it as a calendar nudge backed by federal authority. The IRS uses these reminders to reduce underpayment and late-payment activity (see IRS guidance on estimated taxes).

Source: IRS — Estimated Taxes and Form 1040-ES (irs.gov).

Is Letter 3354 a bill? Do I owe money immediately?

No. Letter 3354 is not the same as a bill or a levy notice. It is an educational reminder. If the IRS believes you owe unpaid tax or has adjusted your account, you would receive a different notice (for example, a Notice CP14 or a balance-due notice). Still, treat Letter 3354 seriously: it suggests you may need to act to avoid underpayment penalties.

First actions to take (step-by-step)

1. Verify the notice is legitimate

• Check the return address and the letter’s phrasing. Genuine IRS letters will include a notice number in the top right and instructions on how to respond. If you’re unsure, call the IRS phone number listed on the IRS website for notices—do not use phone numbers from suspicious emails or callers.
• If you think the letter is fraudulent, report it. The IRS has guidance on phishing and scams on IRS.gov.

1. Match the details to your records

• Compare the tax year referenced with your last filed return and your current year income projections.
• Pull year-to-date income and withholding statements (pay stubs, 1099s, brokerage dividends) so you can estimate whether you’re on track.

1. Recalculate estimated tax obligation

• Use Form 1040-ES and the Estimated Tax Worksheet to estimate quarterly payments. You can also use the IRS withholding calculator or tax software.
• Remember the two common safe-harbor rules to avoid penalties: pay at least 90% of the current year’s tax liability, or 100% of the prior year’s tax (110% if your adjusted gross income was over $150,000) (IRS guidance, Pub. 505).

1. Make a payment or adjust withholding

• Pay electronically with IRS Direct Pay, EFTPS, or by credit/debit where available. You can also mail the voucher from Form 1040-ES with a check.
• If you have wages, consider increasing withholding on Form W-4. Withholding is treated as paid evenly throughout the year and can reduce or eliminate estimated payment needs.

1. Document your decisions

• Save the letter and a copy of any new payment, updated W-4, or confirmation of EFTPS/Direct Pay submission.

How to pay estimated taxes (practical options)

• Online: IRS Direct Pay (no fee) or the Electronic Federal Tax Payment System (EFTPS). EFTPS requires enrollment but supports scheduling future payments.
• Mail: Use the quarterly voucher in Form 1040-ES with a check or money order.
• Withholding: Submit an updated Form W-4 to an employer; increased withholding counts toward your tax payments for the year.

For taxpayers who receive King-sized 1099 income (freelancers, gig workers, investors), electronic payments or adjusting withholding if you still have W-2 wages are typically the fastest fixes.

Safe-harbor rules and penalties (brief)

To avoid the estimated tax penalty, the IRS generally requires you to pay either:

• At least 90% of your current year’s tax, or
• 100% of your prior year’s tax (110% if your prior-year AGI was more than $150,000).

If you meet one of those thresholds through a combination of withholding and estimated payments, you will likely avoid a penalty. The IRS calculates any underpayment penalty based on the amount and timing of missing payments (Pub. 505 and Topic 505).

Source: IRS Publication 505 and IRS Topic 505 — Tax Withholding and Estimated Tax (irs.gov).

Common situations that trigger Letter 3354

• You moved from W-2 employment to self-employment or side gigs and did not start quarterly payments.
• You had a large investment sale, dividend, or retirement distribution and did not have sufficient withholding.
• Your withholding was reduced after a job change or an updated Form W-4.

In my practice, a frequent case is the freelancer who believed “I’ll pay it when I file.” That approach often causes penalties—quarterly payments smooth the burden.

Example: How a client handled Letter 3354

A freelance designer I work with received Letter 3354 after a year with higher-than-expected contract income. We did the following:

1. Verified the IRS letter and collected her year-to-date 1099 income records.
2. Used Form 1040-ES to project tax due and calculated what she needed to pay for the remaining quarters.
3. Made an immediate catch-up payment via EFTPS and set quarterly payments for the rest of the year.
4. Adjusted estimated payments to reflect new income projections; we revisited the plan each quarter.

That approach avoided a late-payment penalty and prevented a larger balance at filing time.

What to do if you disagree with the notice

• If you think the IRS used wrong information (wrong year, wrong taxpayer status), call the number on the letter and ask for clarification. Keep notes of the call: date, representative name, and reference number.
• If the IRS incorrectly assessed a balance, you may need to provide proof (pay stubs, 1099s) and follow up in writing.
• For formal disputes, consult a tax professional or consider representation by an enrolled agent or CPA.

Avoiding common mistakes

• Don’t ignore the letter. Ignoring reminders can create or compound penalties.
• Don’t assume it’s a bill. Treat it as a prompt to verify whether your payments are on track.
• Avoid making ad-hoc payments without documentation—record payment confirmation numbers.

Helpful resources

• IRS — Estimated Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes (official guidance)
• IRS Form 1040-ES and vouchers: https://www.irs.gov/forms-pubs/about-form-1040-es
• IRS Publication 505, Tax Withholding and Estimated Tax: https://www.irs.gov/publications/p505

On FinHelp, you may also find these related guides useful:

• Estimated Taxes (overview) — https://finhelp.io/glossary/estimated-taxes/ (explains who pays estimated taxes and why)
• How Estimated Tax Payments Work for Gig Economy Workers — https://finhelp.io/glossary/how-estimated-tax-payments-work-for-gig-economy-workers/ (practical tips for contractors and gig workers)
• How to Avoid the Estimated Tax Penalty — https://finhelp.io/glossary/how-to-avoid-the-estimated-tax-penalty/ (payment strategies and safe-harbor details)

Frequently asked questions (brief)

Q: Will Letter 3354 trigger collection action?
A: Not by itself. Collection notices and levies are different notices. But unaddressed underpayment can lead to collection later.

Q: Can I ask for a waiver of underpayment penalty?
A: Yes, in limited circumstances—if you had a casualty, disaster, or extraordinary situation, or you can show reasonable cause. The IRS reviews penalty relief requests case-by-case (see Publication 505).

Q: How often does the IRS send Letter 3354?
A: There’s no set schedule; the IRS sends reminders as part of taxpayer outreach based on account data and filing history.

Final checklist (quick)

• Verify the letter’s legitimacy.
• Match the referenced tax year to your records.
• Use Form 1040-ES or tax software to recalculate estimated payments.
• Pay electronically or adjust withholding.
• Keep documentation and revisit estimates each quarter.

Professional disclaimer: This article is educational and not a substitute for personalized tax advice. Rules change; consult a CPA, enrolled agent, or the IRS for decisions that affect your tax situation. My recommendations reflect professional practice and general IRS guidance as of 2025.

Author credentials: With over 15 years advising clients on tax and financial planning, I’ve helped individuals and small businesses respond to IRS notices and set up payment strategies that reduce penalties and cash-flow shocks.