[Updated Oct 2016] – The due date for filing your extension approved 2015 tax returns is coming up soon (Oct 17th). So ensure you take the appropriate action to pay your taxes due or get enrolled in an IRS installment payment plan.
Even if you don’t have enough money to pay your entire tax bill when due you must take action. Inside your head, you scream, “I need more time!” But before you stress out realize that the IRS offers a 6-month tax filing deadline extension that is not that hard to get. So ask yourself, “Should I file a tax return or file a tax extension?”
It’s better to prepare and file a tax return or tax extension even if you can’t pay your entire tax bill. The penalties for doing nothing are far higher if you don’t file or request an extension to file. So, pay as much or as little as you can but do efile an extension or tax return.
The Truth About Tax Extensions
Here is a common misconception: “A tax extension postpones my deadline to file and to pay. I will face no IRS penalties for late payment if I file an extension.”
The truth is this: A tax extension is only an extension of time to file. You do not get an extension of time to pay. If you do not pay at least 90% of your total tax debt by Tax Day, you will face interest and penalties–even if you get an extension.
But you should file a tax return or a tax extension on time–even if you cannot pay–in order to avoid the worst penalties. The IRS penalties for failure to file a tax return are much more expensive than the penalties for late payment.
What Penalties Could You Face?
It depends on your exact situation. One of the following four common scenarios may apply to you:
1. You requested & filed a tax extension and paid at least 90% of your tax bill by Tax Day: You will not be penalized for late payment. However, if you efile or file your tax return by the extension deadline, but do not pay the remainder of your bill by that deadline, you will probably pay a failure-to-pay penalty. This is 0.5% of your balance due for each month (or part of the month) you let your taxes go unpaid (maximum: 25%).
2. You requested & filed a tax extension and did not pay at least 90% of your tax bill by Tax Day: You may have to pay the failure-to-pay penalty. If you efile or file your tax return by the extension deadline, but did not pay your entire bill by that deadline, you will still collect that penalty until you pay it off.
3. You requested & filed a tax extension and paid at least 90% of your tax bill by Tax Day, but did not file or efile your tax return by that deadline: You may have to pay the failure-to-file penalty. This is 5% of your unpaid taxes each month you are late. This fee can go up to 25% of your unpaid taxes. If you file more than 60 days late, your minimum failure-to-file penalty will be 100% of your unpaid taxes, or $135.
4. You requested & filed a tax extension and did not pay at least 90% of your tax bill by Tax Day, and you did not efile or file your tax return nor pay your taxes: You may have to pay both penalties. The failure-to-pay penalty will be subtracted from the failure-to-file penalty, unless you file your return more than 60 days late.
So What Should You Do?
If you have enough time prepare and efile a tax return by April 15th, then you should do that. You can file a tax amendment if you need to make any changes to the tax return you have filed, such as filing status, credits, deductions, or income. You can even file a tax extension online now. And the IRS has this advice: don’t panic. Taxpayers who need more time to complete their tax return can request an automatic six-month extension.
However, if it is a few days before the deadline and you do not have all of your tax documents in order, you should consider filing an extension by April 15. If you cannot afford to pay your entire tax bill by that time, you should pay what you can afford when you file a tax return or an extension, because the penalties are based on the total amount due. Even if you missed the deadline to file an extension, you should go ahead and file your tax return now to avoid further penalties and interest, because they will keep adding up monthly.