With the April 15th tax deadline quickly approaching, millions of Americans are stressed about getting their taxes filed on time and paying Uncle Sam any tax balance due. What taxpayers aren’t aware of, however, is that filing a tax extension will not only get you 6 more months to file your taxes, but could also provide you with the cheapest loan around, directly from the IRS.
While the popularity of tax extensions is growing due to increased complexity in tax code and a tough economy, many misconceptions still surround extensions. For example, many believe an extension to file your taxes increases chances of audit. That’s not true. If anything, a tax extension lessens one’s chances of being audited.
The biggest misconception of them all, and least understood, is that filing for a tax extension will result in costly penalties and fines from the IRS – quite possibly exactly what the IRS and online tax preparation companies want you to believe… but reality is likely to surprise you.
It sickens me to see online tax companies using scare tactics to get people to file by April 15th so they can get paid. More than 15 million tax extensions are approved by the IRS annually, and there’s absolutely nothing wrong with asking for more time to file or pay for your taxes. Heck, I do it every year.
Here are the facts. There are three potential finance penalties associated with not paying your taxes:
1. Late Filing Penalty. If you do nothing – you don’t file either your taxes or an extension by midnight of April 15th - you will be assessed a late filing penalty. And this one hurts. The penalty is 5% of your balance due per, month, or $50 for each $1,000 you owe. However, simply filing a tax extension means no late filing penalty until October 15th. Congratulations – one down and two to go.
2. Late Payment Penalty. If you file your taxes or are approved for an extension and don’t pay your balance, you will likely be charged a late payment penalty which is ½ of 1 percent per month for the balance you owe. This works out to be $5 per month for each $1,000 you owe the IRS… not bad.
3. IRS Interest. On top of the measly late payment penalty, you are also subject to paying the IRS interest on your late payment. The IRS sets this interest rate on a quarterly basis, which has been 4% for the last 5 quarters. Roughly calculated, you’ll need to pay another $3.33 for each month that you don’t pay the IRS on that same $1,000.
Here’s where the cheap loan comes in: let’s assume you owe the IRS $1,000 in taxes this year and decide to file a tax extension and defer your tax payment until October 15th, the extended tax deadline. You will pay about $50 in penalties and interest on that $1,000 loan over the course of 6 months – quite a bargain, actually!
One last word of caution: Never, ever put a tax balance on a credit card. You will first have to pay what is called a “convenience fee” that runs about 2.5% of your balance due ($25 for each $1,000 you owe), and credit card interest on top of that. Over the same six month period where you’ll only have to come up with an extra $50 by filing an extension, you’ll be paying hundreds if you keep that balance on a credit card.