Most taxpayers assume that filing an extension gives them an extension of time to pay their taxes that are due. This is a big misconception! Filing an extension with the IRS, using a Form 4868, does exactly what the name of the form says it does; it is an “Application for Automatic Extension of Time to File US Individual Tax Return”. If you have tax due, you will still have to pay that amount due before the deadline or you will be assessed interest and penalties.
There are two very different penalties that can be imposed and they depend on what part of the return was not done timely.
Failure-To-File Penalty:
- This penalty is assessed when you do not file your tax return on time and do not file an extension with Form 4868 by the deadline.
- Filing late can usually bring a penalty of 5% of the unpaid taxes for each month or part of a month that a return is late. The maximum of this penalty will not exceed 25 percent of the unpaid taxes.
- This penalty is usually higher than a failure-to-pay penalty. So it is generally recommended to at least file your tax return if you are able, which can help you avoid one of the two penalties.
- If you do not file your return within 60 days of the due date (original or extended), you will be charged a minimum penalty for failing to file. This amounts to the smaller of $135 or 100% of your unpaid taxes.
Failure-To-Pay Penalty:
- This penalty is imposed when you do not pay your taxes by the due date. Even if you file an extension with Form 4868, you are still required to your tax due by the deadline.
- Paying your tax late assesses you 0.50% (one half of 1%) penalty of the unpaid tax for each month (or partial month) that the tax remains unpaid. This penalty cannot be more than 25% of the unpaid tax.
- If you pay at least 90% of the tax due by the deadline along with filing an extension, you will not face a failure-to-pay penalty.
If you do not file your tax return timely and do not pay timely, the IRS will not charge you double the penalties. Actually, they combine them, so the 5% failure-to-file penalty is reduced by the failure-to-pay penalty. But, the minimum for filing more than 60 days late still stays the same at either $135 or 100% of the unpaid taxes. The IRS will allow you to be exempt from these penalties if you are able to show there is a reasonable explanation for being late and that it was not because you willfully neglected to file or pay. To see if you may face these penalties, contact your accountant’s office today.