"Extension to file does not equal extension to pay." is a crucial concept often overlooked by US taxpayers, leading to unexpected penalties and interest charges.
Key Takeaways:
The extension to file applies only to submitting your tax return, not paying your taxes. You still owe the full amount by the original due date (April 15th for most individuals).
Failing to pay on time triggers penalties and interest even with a filed extension.
Making estimated payments by April 15th can help avoid penalties.
Know the Deadlines:
April 15th: Regular due date for most individual income tax returns.
June 15th: Automatic income tax filing extension for those who are living or working abroad.
October 15th: Extended tax filing deadline for those who request it (Form 4868).
Note: These extensions only grant more time to file, not to pay.
For example:
If you are an American working or living outside the United States, and you are abroad on the filing deadline, the filing deadline can be automatically extended to June 15th of each year.
Extension to Pay?
While the extension to file gives you more time to prepare and submit your tax return, it does not grant an extension to pay any taxes owed. This means that if you owe taxes to the IRS, those payments are still due by the original tax deadline, which is usually April 15th of each year.
What are our suggestions?
Make estimated tax payments by April 15th when requesting an extension. These are refunded when you file your return.
Provide your CPA with all income information and bank details for accurate advanced payment estimates.
What to Do If I Received a Penalty Notice:
Review the penalties: Understand the charges and the reasons.
Pay the outstanding amount: Minimize further interest and penalties.
Contact the IRS: Discuss payment options like installment agreements if immediate payment is difficult.
Remember: Timely action is crucial to avoid further penalties and maintain tax compliance. Don't hesitate to reach out to your CPA for clarification or assistance. By raising awareness, taxpayers can avoid unnecessary penalties and stay in good standing with the IRS.
Penalties for Late Payment:
The Failure to Pay penalty applies if you don’t pay the tax when due. The penalty you must pay is a percentage of the taxes you didn’t pay.
Failure to Pay Penalty: 0.5% of unpaid taxes for each month late, up to a maximum of 25%. This penalty accrues even if you filed on time.
If you don’t pay the amount shown as tax you owe on your return, below are the calculations for the Failure to Pay penalty:
The Failure to Pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. The penalty won’t exceed 25% of your unpaid taxes.
If both a Failure to Pay and a Failure to File penalty are applied in the same month, the Failure to File penalty will be reduced by the amount of the Failure to Pay penalty applied in that month. For example, instead of a 5% Failure to File penalty for the month, we would apply a 4.5% Failure to File penalty and a 0.5% Failure to Pay penalty.
If you filed your tax return on time as an individual and you have an approved payment plan, the Failure to Pay penalty is reduced to 0.25% per month (or partial month) during your approved payment plan.
If you don’t pay your tax in 10 days after getting a notice from us with our intent to levy, the Failure to Pay penalty is 1% per month or partial month.
We apply full monthly charges, even if you pay your tax in full before the month ends.
Source from the IRS website: https://www.irs.gov/payments/failure-to-pay-penalty.
Penalties for Failure to File:
The Failure to File penalty applies if you don't file your tax return by the due date. The penalty you must pay is a percentage of the taxes you didn't pay on time.
Failure to File penalty: 5% of unpaid taxes per month, capped at 25% (reduced by the Failure to Pay penalty for that month).
The Failure to File penalty is based on how late you file your tax return and the amount of unpaid tax as of the original payment due date (not the extension due date). Unpaid tax is the total tax required to be shown on your return minus amounts paid through withholding, estimated tax payments, and allowed refundable credits. Below are the calculations for the Failure to File penalty:
The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won't exceed 25% of your unpaid taxes.
If both a Failure to File and a Failure to Pay penalty are applied in the same month, the Failure to File penalty is reduced by the amount of the Failure to Pay penalty for that month, for a combined penalty of 5% for each month or part of a month that your return was late.
If after 5 months you still haven't paid, the Failure to File penalty will max out, but the Failure to Pay penalty continues until the tax is paid, up to its maximum of 25% of the unpaid tax as of the due date.
For more information, please refer to the IRS website: https://www.irs.gov/payments/failure-to-file-penalty.
By following these tips and understanding the key differences between filing extensions and the payment deadline, you can avoid unnecessary penalties and ensure timely tax compliance.
Note: This article is intended for informational purposes only and provided above is up-to-date as of December 2023. Always consult with a qualified tax professional for personalized guidance on your specific tax situation.
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