Understanding Interest & Penalties

[jeffhoward001]

Hello -

I received a notice of interest & penalties for late payment. This is mostly a fact-finding mission to understand what I did wrong since (I thought) I did this in previous tax years and it worked fine.

Using fake but relatable numbers, say my salary is $150,000 in 2023.  Then in 2024 Q4 I sold a rental property for $400,000.

I used the 110% rule to pay 110% of my 2023 tax obligation in 2024 Q4 instead of paying estimated tax on the $400,000.  Due to some pass-through K1 income, I had to file an extension in April, and I wonder if this is where the issue happened.

When I filed the extension in April, I did not pay any additional tax as I thought I was covered by the Q4 estimated payment (that was 110% of my 2023 tax paid). The interest & penalties notice began charging interest starting April 15th on the outstanding tax for the $400,000.

Looking through previous tax years, I've done this before when I had an abnormally large tax year and I don't recall getting charged interest between April & October. I did some research online for the 110% Rule and couldn't find much about how it works with extensions. 

Any ideas? Does the 110% rule not cover you when filing an extension? 

[Bsch4477]

My guess is that you were caught out by the rule that your tax liability must be paid in quarterly installments. Loading your payment into the latter part of the year won’t make up for the requirement to pay quarterly. When did you receive the rental sale income?  It might be possible to mitigate your penalty by completing Form 2210. 

[jeffhoward001]

I called the IRS and they said that a Form 2210 was not filed with my return (I used e-file). I'm working with them to see if refiling the Form 2210 will help.