If You File an Extension, Do You Pay Interest?

Many taxpayers seek to extend their tax filing deadline, often believing this also grants them more time to pay any taxes they owe. This common misconception can lead to unexpected interest charges and penalties. Understanding the distinction between extending the time to file and the time to pay is important for managing tax obligations effectively.

Understanding Tax Extensions

A tax extension provides individuals or businesses with additional time to submit their tax return documents. For most individual taxpayers, this extends the typical April 15 deadline to October 15. The purpose of an extension is solely to grant more time for preparing and filing the necessary paperwork, such as Form 4868 for individuals.

An extension of time to file does not extend the deadline for paying taxes. The original tax payment due date, typically April 15 for individuals, remains unchanged regardless of whether an extension to file has been granted.

Interest on Underpayments

If you file an extension but do not pay your full tax liability by the original due date, interest will be charged on any unpaid balance. This interest begins accruing from the original tax due date, usually April 15, until the date the tax is paid in full.

The Internal Revenue Service (IRS) determines interest rates quarterly, basing them on the federal short-term rate plus three percentage points for individuals. This interest is compounded daily. Unlike penalties, interest generally cannot be waived or reduced, even if a taxpayer enters into a payment plan.

Penalties Associated with Extensions

While a filing extension prevents the “failure-to-file” penalty, it does not prevent the “failure-to-pay” penalty if taxes are owed and not paid by the original deadline. The failure-to-file penalty is 5% of the unpaid taxes for each month or part of a month the return is late, up to a maximum of 25%.

The failure-to-pay penalty is 0.5% of the unpaid taxes for each month or part of a month the taxes remain unpaid, also capped at 25% of the unpaid tax. Penalties may sometimes be waived for “reasonable cause,” which can include events beyond a taxpayer’s control, such as serious illness, natural disasters, or the inability to obtain records. However, financial inability to pay is generally not sufficient for penalty abatement unless extreme circumstances can be proven.

Strategies to Minimize Interest and Penalties

To mitigate potential interest and penalties, taxpayers who file an extension should pay as much of their estimated tax liability as possible by the original tax deadline. Estimating the amount owed can be done by reviewing the prior year’s tax liability or by calculating current year income and deductions. Even if the exact amount is unknown, paying a reasonable estimate can significantly reduce or eliminate potential charges.

If the full amount cannot be paid by the deadline, taxpayers can explore various payment options with the IRS. These options include short-term payment plans, typically up to 180 days, or long-term installment agreements, which allow monthly payments over a longer period. While interest continues to accrue on unpaid balances under a payment plan, the failure-to-pay penalty rate may be reduced. Entering into such an agreement requires taxpayers to be current with all filing and payment requirements.