There are plenty of sources of income not nipped by withholding: income from self-employment, investments, rents, alimony. prizes, etc. But avoiding withholding doesn't mean escaping the government's pay-as-you-go demands.
If the gap between what you expect to owe and the amount you expect to be withheld is $1,000 or more, you may have to make estimated payments.
For a complete discussion of estimated tax payments, see help for Estimated Tax.
Don't overlook any of the payments you've already made to cover your 2006 tax bill. Besides withholding. did you make quarterly estimated tax payments? Did you assign a refund due on your 2005 return to your first estimated 2006 payment? Are you subject to back-up withholding? Go through the Interview here to be sure you get credit for all the taxes you've already paid.
The IRS would love to get a crack at your dividends and interest income before you do. In the 1980s, in fact, Congress actually approved a plan to automatically divert 10% of such earnings to the IRS as a prepayment of the tax due. But the lawmakers backed down in the face of a fierce taxpayer protest. Still, it is possible for a bank or business to claim a chunk of your interest or dividend payments as "backup withholding.'' The rate is a flat 28% 2006.
Backup withholding applies when the bank or other payer doesn't have, or doesn't think it has, your Social Security number—the taxpayer identification number used to report the income to the IRS. If you forget or refuse to give the bank or business your Social Security number, or the IRS tells the payer that you provided an incorrect number, 28% of your dividends or income will be diverted to the IRS.
Backup withholding can also be ordered by the IRS if it concludes you failed to report on your tax return interest or dividends you received during the previous year.
Backup withholding shouldn't cause you any trouble if you've been reporting all your interest and dividend income properly—although foul-ups will inevitably trip up some taxpayers. The rules also mean more forms to fill out and sign when you open an account, to certify that you've provided the right Social Security number and that you're not subject to IRS-ordered backup withholding