Need More Time?

By: Mackenna R. Parks, EA

April 12, 2024

             The April 15th tax filing deadline is quickly approaching! However, you may be thinking “I’m not ready!”. Sometimes, it’s not possible to gather all your tax information by the tax filing deadline. I have some good news; it’s okay! If you need more time, you should file for an extension on Form 4868.

             An extension will give you until October 15th to file and allows you to avoid “failure-to-file” penalties. However, it is important to remember that an extension only provides you extra time to file, not to pay. It is important to estimate your tax liability prior to the deadline so you can submit payment with your extension filing, or you’ll incur penalties, which in some cases can be steep.

Two Different Penalties

             There are two different common penalties you can incur with the filing of your taxes. The two penalties are failure-to-file and failure-to-pay. The failure-to-pay penalty is calculated based on the amount shown as due on the filing. This penalty runs at 0.5% of your liability for each month (or part of a month) the payment is late. For example, if payment is due April 15th and is made May 25th, the penalty is 1% (0.5% times 2 months or partial months). The maximum percentage you can reach for failure-to-pay is 25%.

The failure-to-file penalty runs at a more severe rate, which is why it is so important to file an extension. This penalty runs at 5% per month (or partial month) of lateness to a maximum of 25%. Therefore, the failure-to-pay penalty can also compound on top of this penalty for 0.5% each month (or partial) for 45 more months (an additional 22.5%). Thus, the combined penalties can reach a total of 47.5% over time.

The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, and not just the amount shown as due. What this means is credit is given for amounts paid through withholding and estimated payments to get to the amount due on the return. The failure-to-file penalty is calculated on total tax due before being credited with your withholding and estimated tax payments.

A minimum failure-to-file also applies if a return is filed more than 60 days late. This minimum penalty is the lesser of $485 (for returns due after December 31, 2023) or the amount of tax required to be shown on the return.

Exemption in Certain Cases

            Both penalties may be excused by the IRS if lateness is due to “reasonable cause” such as death or serious illness in the immediate family.

Interest is assessed at a fluctuating rate announced by the government apart from and in addition to the above penalties. Furthermore, in particularly abusive situations involving a fraudulent failure-to-file, the late filing penalty can jump up to 15% per month, with a 75% maximum.

If you have questions about filing a Form 4868, IRS penalties, or received an IRS notice regarding penalties, contact your tax professional.