Filing a tax extension is a smart move if you need extra time to complete your return, but it’s essential to understand how extensions work when it comes to penalties. Many taxpayers wonder, “Will I face a late filing penalty if I file an extension?” Here’s what you need to know to stay compliant and avoid unnecessary fees.
How Tax Extensions Work
When you file an extension using Form 4868, the IRS grants you an additional six months to submit your completed tax return. This means the filing deadline is extended from April 15 to October 15 (or the next business day if it falls on a weekend or holiday).
However, a tax extension only applies to the submission of your return—not the payment of any taxes owed. Taxes are still due by the original deadline, typically April 15.
Late Filing Penalty
If you successfully file an extension, you avoid the late filing penalty, which is 5% of the unpaid taxes for each month (or part of a month) your return is late, up to a maximum of 25%. Filing an extension ensures you won’t face this penalty as long as you submit your completed return by the extended deadline.
Late Payment Penalty
While an extension protects you from the late filing penalty, it doesn’t exempt you from the late payment penalty if you owe taxes. The late payment penalty is 0.5% of the unpaid taxes for each month (or part of a month) after the April deadline, up to a maximum of 25%.
To avoid or minimize the late payment penalty:
- Pay estimated taxes by April 15: Use the IRS Direct Pay system, EFTPS, or send a payment with Form 4868.
- Request a payment plan: If you can’t pay the full amount, setting up a payment plan with the IRS can reduce penalties.
Interest on Unpaid Taxes
In addition to the late payment penalty, the IRS charges interest on unpaid taxes from the original due date (April 15) until the balance is paid in full. The interest rate is determined quarterly and compounds daily, so paying as much as you can by the original deadline is crucial.
Key Benefits of Filing an Extension
- Avoids the 5% late filing penalty.
- Provides extra time to prepare an accurate and complete return.
- Prevents audit triggers from rushing through your tax preparation.
Final Thoughts
Filing an extension can save you from hefty late filing penalties, but it’s important to remember that taxes are still due by the original deadline. To avoid additional costs, estimate and pay as much of your tax liability as possible by April 15. If you’re unsure how much you owe or need help managing your tax situation, consult a tax professional for guidance.
