How Much Is an Extension for Taxes and What Should You Pay?
Learn how tax extensions work, what costs may apply, and how to avoid penalties or interest when delaying your tax filing.
Tax extensions give filers extra time to submit their returns, but they don’t delay the payment deadline. Many taxpayers assume an extension postpones everything, leading to unexpected penalties and interest charges. Understanding potential costs when requesting an extension is crucial to avoid unnecessary expenses.
Filing an Extension: Fees or Charges
Requesting a tax extension is free when using IRS Form 4868 for individuals or Form 7004 for businesses. The IRS grants extensions automatically if the form is submitted by the original deadline, typically April 15. However, state requirements vary. California offers an automatic six-month extension without paperwork, while New York requires Form IT-370 but does not charge a fee. Some states may require a formal request and charge a filing fee.
Though the IRS does not charge for an extension, tax preparation services might. Many online platforms, such as TurboTax and H&R Block, allow users to file at no cost, but tax professionals may charge for assistance, especially when estimating tax liability. Fees for professional help can range from $50 to several hundred dollars, depending on the return’s complexity.
Penalties for Underpayment
Failing to pay enough taxes by the original due date can result in penalties, even with an extension. The IRS requires taxpayers to pay at least 90% of their total tax liability by April 15 to avoid penalties. If payments fall short, a penalty of 0.5% per month is assessed on the unpaid balance, up to 25%.
For example, if a taxpayer owes $5,000 and does not pay on time, they could face a $25 monthly penalty until the balance is settled or the cap is reached. This penalty is separate from interest charges.
Estimated tax payments help determine underpayment penalties. Self-employed individuals and those with significant investment income must make quarterly estimated payments. If these payments are insufficient or missed, additional penalties may apply. The IRS allows taxpayers to avoid penalties if they pay at least 100% of the prior year’s tax liability (or 110% for higher earners).
Interest on Unpaid Taxes
Unpaid taxes accumulate interest, increasing the total amount owed. The IRS calculates interest daily on any outstanding balance, starting the day after the original tax deadline. Unlike penalties, which have caps, interest continues to accrue until full payment is made.
The interest rate is determined quarterly, based on the federal short-term rate plus 3%. As of 2024, this rate is 8% for individuals. If a taxpayer owes $10,000, daily interest accrues at approximately $2.19, adding up to about $66 per month. Since the rate is adjusted every three months, the cost of delaying payment can fluctuate.
Interest applies to both the original tax liability and any penalties. This compounding effect can cause an unpaid balance to grow faster than expected. Unlike penalties, which may be waived under certain conditions, interest is generally non-negotiable. Even if a taxpayer qualifies for penalty relief, the IRS still requires payment of accrued interest.
Waiver Provisions for Penalties
The IRS offers penalty relief in specific cases. One common option is the First-Time Penalty Abatement (FTA), available to taxpayers with a clean compliance history. To qualify, the individual or business must have filed all required returns and not incurred penalties in the prior three years. If approved, this waiver eliminates failure-to-file and failure-to-pay penalties, though interest still accrues.
Beyond FTA, reasonable cause relief is available when taxpayers can show that circumstances beyond their control prevented timely payment. Acceptable reasons include natural disasters, serious illness, or incorrect tax advice from a professional. Each case is reviewed individually, and taxpayers must provide documentation such as medical records, insurance claims, or legal correspondence. Unlike FTA, reasonable cause relief is not automatic and requires a written request explaining the circumstances.