An IRS-approved tax extension provides you with extra time to file, but not extra time to pay any tax balance due. That doesn't mean, however, that filing a tax extension won't save you money.

There are up to 3 penalties you could face by not filing and/or paying what you owe the IRS on time (which is April 15 for most individuals). Here is a simple explanation of the different penalty charges.

IRS Late Filing Penalty

Also called the “failure-to-file penalty,” this fee is assessed if you owe tax and you don’t file your return (or tax extension) on time.

Fee: 5% of the unpaid tax for each month (or part of a month) that your return is overdue, up to 5 months. If your tax return is more than 60 days late, the minimum penalty is $135 or 100% of the tax due, whichever is less.

Example: For each $1,000 you owe the IRS, the late filing penalty is $50 per month.

Luckily, the late filing penalty can be easily avoided if you submit a tax extension by the original due date of your return.

IRS Late Payment Penalty

This penalty is assessed if you don’t pay all the amounts you owe on time, even if you file a tax return (or tax extension) by the proper deadline.

Fee: 0.5% of the unpaid tax for each month (or part of a month) that your tax goes unpaid, up to a maximum of 25%. If your tax balance is still unpaid 10 days after the IRS issues a “Notice of Intent to Levy,” this penalty increases to 1.0%. On the other hand, if you filed on time and you’ve set up an Installment Agreement with the IRS, the penalty decreases to 0.25%.

Example: For each $1,000 you owe the IRS, the initial late payment penalty is $5 per month. Depending on your situation, this penalty may increase to $10 per month, or decrease to $2.50 per month, for each $1000 that you owe.

IRS Interest Charges

Interest is charged on any unpaid tax, whether or not you’ve filed your tax return (or tax extension) on time. Interest compounds daily and the interest rate is determined every quarter (3 months).

Fee: The interest rate is the Federal short-term rate plus 3%. (For the first quarter of 2015, the interest rate is 3% for underpayments of tax.)

Example: For each $1,000 you owe the IRS, the interest charge is $30 (using the above 3% rate).

 

Here'a short video with more information about how a tax extension saves you money:

 

If you are unable to pay your tax balance on time, you can avoid the costly IRS Late Filing Penalty by filing for a tax extension with FileLater.