With another April 15th in the books, taxpayers are generally in one of two camps: (1) a tax return has been filed or (2) an extension has been filed. While extensions are great for people looking to buy some extra time in filing (and possibly paying) their taxes, there are some things to keep in mind after filing the extension and just revisiting the issue in mid October.
If you have ever owed money to the IRS, you know how quickly the interest can add up and cause your total liability to skyrocket. Unfortunately, filing an extension does not stop the interest from piling up, and it will be calculated starting from April 15th and not stopping until your liability is paid in full. The current interest rate is 3%, calculated for each day your balance is not paid in full.
Contrary to popular belief, filing for an extension is not a “free pass” until the extended October 15th date. Rather, the IRS can still hit you with a failure to pay penalty, which is a penalty for late payment of your taxes. The process to file for an extension is short and sweet (Form 4868), but there is a reason it asks for an estimate of your total tax liability for the past year, so that you have an opportunity to avoid the late payment penalty. The penalty is generally half of 1% for each month the IRS does not receive payment, maxing out at 25%.
That being said, there are a couple ways to get around this penalty. First, if you file for an extension and you paid at least 90% of your total liability by April 15th, you should avoid the failure to pay penalty, assuming the remaining balance is paid by October 15th. Additionally, there is always the ability to show reasonable cause for why your payment was late, which could get you out of having to pay the penalty.
With the penalties and interest looming, the best plan is to get your return in as soon as possible, along with as much as you can pay. The quicker everything gets filed and paid, the more money you will have in your pocket. I have worked with numerous people who have owed more in penalties and interest than the actual principal of their balance because things have gotten out of hand, so take a day to enjoy your extension and get back to your return.
This post is provided for informational purposes only and does not constitute legal advice. It is intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results. It is not intended to create an attorney-client relationship and is offered only for general informational and educational purposes. You should not act or rely on any information contained in this website without first seeking the advice of an attorney.