Income Tax Extensions: Payments and Penalties Explained
Filing a tax extension gives you six extra months to file your tax return (5 months for certain business entities) But if you owe taxes, the IRS requires that you still pay by the original due date of your return (typically April 15 for individuals and March 15 for businesses).
This may seem a bit counterintuitive to many taxpayers. Isn't the whole point of getting a tax extension so that you don't have to pay right away?
Unfortunately, no. A tax extension gives you the time you need to prepare a completely accurate tax return, but the IRS will not wait six months to receive the taxes you owe. If your tax return comes out better than you had expected, you may get a tax refund. If it comes out worse than expected, you will have to pay the additional tax due to the IRS. Despite what you may or may not owe, you are still required to pay by the original filing deadline.
What If I Don’t Pay?
If you don't pay your income taxes by April 15 (or your business taxes by March 15), the IRS will most likely assess a late payment penalty and interest charges which accumulate each month that your taxes go unpaid.
The late payment penalty is 0.5% of the unpaid taxes, assessed on a monthly basis, up to a maximum of 25%. For example, if you have $2,000.00 in unpaid taxes, the IRS may charge you $10.00 per month as a late payment penalty (because $2,000.00 x 0.5% = $10.00).
If your tax is still unpaid 10 days after the IRS issues a “Notice of Intent to Levy,” the late payment penalty increases to 1.0%. On the other hand, if you filed on time and you set up an Installment Agreement with the IRS, the late payment penalty decreases to 0.25%.
Keep in mind, you may not be subject to a late payment penalty if you filed a tax extension on time (by the original deadline of your return) and paid at least 90% of your tax liability with your extension. At FileLater.com, you can file your tax extension online and electronically pay your tax due using our IRS-approved e-file system.
The IRS also charges interest on any outstanding tax balance. Interest is compounded daily and accrues from the due date of your tax return until the day you pay your taxes. The interest rate is determined on a quarterly basis. Currently, the interest rate is equivalent to the Federal short-term rate plus 3%.
Finally, there is a late filing penalty (also called the failure-to-file penalty) which is imposed if you owe tax to the IRS and you don’t file on time. This fee is 5% of the unpaid taxes, assessed on a monthly basis, up to a maximum of 5 months. If your tax return is more than 60 days late, the minimum late filing penalty is $135 or 100% of the tax due, whichever is less.
If you aren’t sure whether you’ll be getting a tax refund or you will owe a tax payment when you ultimately file your return… don’t worry. The FileLater system can help you estimate your income taxes with our simple tax calculator. It’s just one more reason to file your income tax extension online at FileLater.com.