Why do I have a penalty when I have a large refund and paid estimated tax in the next payment time after a capital gain?

The IRS has a pay-as-you-go system. To avoid an underpayment penalty, a quarterly payment should have been made in the same period as the large capital gain. If you had a large capital gain in one period with no offsetting tax payment, you would a tax deficit going into the next period. You would be caught up in that next period, but would still not have made up the original shortfall.

You may be able to lower your penalty by annualizing your income, i.e. dividing your income unevenly throughout the year as it was actually received.

You can also request a penalty waiver due to a casualty, disaster, or other unusual circumstance.

The law allows the IRS to waive the penalty if:

1. You didn't make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
2. You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.

For more information, refer to the Instructions for Form 2210