This year’s tax filing deadline is rapidly approaching—if you don’t have time to gather your tax information and file by April 18th, you can use Form 4868 to file for an extension.
An extension allows you to avoid incurring “failure-to-file” penalties and will give you until October 17 to file. However, you’re still required to pay your taxes by April 18th. If you haven’t paid whatever tax you estimate is owed by that date, you’ll incur steep penalties.
Tax deadline penalties: Failure to pay vs. failure to file
Failing to pay and failing to file incur separate penalties.
For each month (or part of a month) your payment is late, the failure-to-pay penalty is 0.5%. For example, if payment is due on April 18 and you pay on June 25, the penalty is 1.5% (0.5% times 3 months or partial months). The maximum failure-to-pay penalty is 25%.
The failure-to-pay penalty is calculated based on the amount that is shown as due on your return (less credits for amounts paid via estimated payments or withholding), even if your actual tax bill is higher. However, if your actual tax bill turns out to be lower, the penalty will be based on the lower amount.
By contrast, the failure-to-file penalty runs at a higher rate of 5% for each month (or partial month) you fail to file after the deadline. The maximum failure-to-file penalty is 25%. As mentioned above, filing an extension on Form 4868 doesn’t exempt you from failure-to-pay penalties—however, it will prevent you from filing late unless you also miss the extended due date.
If both the failure-to-file penalty and the 0.5% failure-to-pay penalty apply, the failure-to-file penalty drops to 4.5% per month (or part of a month), so the combined penalty will be 5%. For the first five months, the maximum combined penalty is 25%. After those five months, the failure-to-pay penalty can continue at 0.5% per month for an additional 45 months—an additional total of 22.5%. The combined penalties can thus reach a maximum total of 47.5%.
Another reason the failure-to-file penalty is more severe is that it’s based on the amount you’re required to show on your return, rather than the amount shown as due. (Credit is given for amounts paid via withholding or estimated payments.)
For example, if your return is filed five months after the due date showing $5,000 owed (after payment credits), the combined penalties will be 25%, which equals $1,250. But if your actual liability is determined to be an additional $1,000, the failure-to-file penalty will also apply to this amount for an additional $225 in penalties (4.5% × 5 = 22.5%). If no amount is owed, there’s no penalty for late filing.
If a return is filed more than 60 days late, there’s also a minimum failure-to-file penalty. For returns due through 2022, this minimum penalty is the lesser of $435 or the amount of tax required to be shown on the return.
If returns are filed late due to “reasonable cause” such as death or serious illness in the immediate family, both penalties may be excused by the IRS.
Apart from and in addition to the above penalties, interest is assessed at a fluctuating rate announced by the government. The late filing penalty can also jump to 15% per month in especially abusive situations involving a fraudulent failure to file, with a 75% maximum.
If you have further questions about filing for an extension or possible IRS penalties, contact us.