As we approach tax filing deadlines, it is a common misconception that if you owe, you can just file an extension and pay later...without interest or penalties.
As with many things IRS or State, if you pretend it will go away by ignoring it, it quickly escalates and becomes very painful fast!
You can almost watch your tax bill amount increase like a stock ticker as daily interest and penalties get added to your amount due. Once again, tax extensions are an extension to file and not an extension to pay.
I'm filing an extension, how do I minimize interest and penalties?
If you need more time and don't owe taxes or are getting a refund, you simply file an extension and you have an extra six months to file.
If you aren't ready to file on time AND will owe taxes, it is in your best interest to make an estimated payment before the original due date of the tax return. Tax balances owed start accruing interest immediately after the original due date of the tax return.
You may also be issued a Failure to Pay penalty. These are no fun and a surprise to your tax bill that will not be welcomed.
How can you avoid paying the IRS and State any more of your hard-earned money than is required?
Make an estimated tax payment WITH your extension, prior to the original due date of your tax return. For most individuals (who are not in disaster zones or military serving overseas), that date is April 15th of the tax year.
Let's say it all together.... An extension of time to file is not an extension of time to pay.
How do you make an estimated payment?
You can specify how much to pay when your extension is filed, with the extension. This needs to be coordinated with your tax preparer in advance.
Myself, like many preparers, will file extensions in advance of the April 15th filing deadline to avoid last minute chaos.
You can also make direct payments to the IRS or your state. Below are YouTube videos and links on how to make a payment.
- How to make a payment to the IRS
- How to make a payment to California
- Franchise Tax Board - CA website: https://www.ftb.ca.gov/pay/
- How to pay California taxes online - YouTube
If paying online, make sure to select the correct year and reason for payment. Also, if you are filing a joint return, make the payment to the tax ID of the person listed first on the tax return.
If I don't pay, how much is the penalty?
For the IRS, the rules are outlined below. Note that your state may also have penalties and interest, and as it depends on the state, we haven't outlined those. For the IRS rules...keep reading.
Unless at least 90% of the tax liability is paid, the penalty for late payment of tax is 0.5% of the tax assessed and is applied for each month (or fraction of a month) that the tax is not paid. The penalty is capped at 25%. (IRC §6651(a)(2) and (a)(3))
An individual who gets an automatic extension of time to file is subject to the penalty if any additional payment due with the extended return either:
- Exceeds 10% of the total shown on the return; or
- Is not paid by the extended filing date. (Treas. Regs. §301.6651‑1(c)(3))
Late-filing penalties (after the extension due date or filed late without an extension)
I forgot to file an extension and I owe. Or I filed after the extension due date, how much will I owe?
If a return is not filed within 60 days of the due date, including extensions, the late‑filing penalty is applied at a rate of 5% of the unpaid tax per month (or fraction of a month) that the return is late, up to a maximum of 25% of the unpaid tax. (IRC §6651)
The law allows an offset against the late‑filing penalty for the amount of the late‑payment penalty. This prevents an overlap of these two penalties. (IRC §6651(c))
These all reflect IRS penalties as of the date of this blog post publication. NOTE that your state may also be accruing interest and penalties and those amounts vary by state.
