It's possible. There are two normal exceptions to the underpayment penalty. The IRS tax system is pay as you go, so when you received the short term capital gains you may have needed to pay estimated tax to cover. Check your tax tax return for 2019 to see what the tax liability was (line 16). Next, review the possible exceptions below. My hope is that you will fall into one of the categories where you actually had enough paid in on time. This will not eliminate any interest for late payment.
Generally, you can avoid the penalty if your total timely estimated payments and withholdings are greater than or equal to the lesser of:
- 90% of the total tax after credits for the current year, or (2020)
- 100% of the total tax after credits in the prior year (2019)
- See one exception below.
You can also avoid the penalty if the amount you owe is less than $1,000 as long as any estimated tax payments you made are timely.
Note: High-income taxpayers. If your adjusted gross income (line 11 of your 2023 Form 1040) is greater than $150,000 (or $75,000 if you're married and file a separate return from your spouse), you can avoid a penalty by paying at least 110% of your total tax from the prior year. These levels also applied in 2020.
There is an annualized method available if you received this in the last quarter of the year which could lower the penalty substantially.
Lastly, you should include a letter with your reply explaining that you always pay your tax when due, that this was not intentional and as soon as you realized the tax was due it was paid. Then ask for consideration of relief of some or all of the penalty. It can happen but there's no guarantee.
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