There are some things about filing an extension for your taxes that most people do not know that can end up costing you money. Here’s what you need to know…
The most important thing to know is that the penalty for not PAYING your taxes on time is relatively small – but the penalty for not FILING on time is very large. So if you can, file before the deadline even if you can’t yet pay!
Filing an extension – it’s not so you can “pay later”
When you file an extension you do not get extra time to pay any tax that is due. This is a common misconception. You are required by the IRS to submit any tax due by the regular deadline along with the extension form.
What filing an extension get’s you is more time to put your tax return together because you do not have the information required to complete the forms.
Examples of this are like when you are expecting a statement from a broker that has not come in yet or you are tracking down an employer that went out of business and you have not yet received a W2.
What happens if you do not pay your taxes and you do not file a tax return?
You are still subject to a penalty each month. For the penalty, you will be charged as much as 5% per month on the tax due not to exceed 25%. For example if you owe $1000 in taxes, the penalty is going to be $50 a month not to exceed $250. There is also interest to consider.
The penalty for not paying on time is much less though. It is often 0.5% per month. So $1000 of tax liability would create $5 of interest each month. That’s not so much in comparison.
Filing your taxes without paying
Instead of getting hit with the 5% penalty, you are only subject to the interest when you file your tax return on time but you do not pay your taxes.
There is no instant gratification here, as you will still be facing the stress of owing taxes to the IRS, but in the long run you will end up paying them MUCH less.
This is more money for you and your family and less money for the politicians. Worth it, in my opinion.
Late filing penalties add up fast and this also draws unwanted attention from the IRS. Just file even if you can’t pay.
There are many options to catch up on late tax payments to the IRS and it’s not the end of the world. Just be sure and respond to there notices and call them to set up a payment plan if you need to.
File as soon as possible even if you file an extension
Even when you file an extension and it gives you until October to file, it still makes sense to file as soon as possible to keep any unexpected penalties down to a minimum. In other words, don’t wait until October – get it done as soon as you can. Such as by the 15th of May, if possible.
If you need to hire someone to complete your extension or your late taxes, contact us here.