Most People Don’t Understand How IRS Extensions Work

Number of the Day: The most relevant or interesting figure in personal finance

54%

That’s the share of people in a new poll who erroneously said filing an extension with the IRS gives you more time to pay any taxes you owe—when in fact, it only gives you more time to get your return in.

An extension lets you take an extra six months to file, but you’re supposed to estimate your federal tax liability and pay any taxes owed by the usual deadline, which this year is April 18. You can still get the extension if you don’t pay, but you’ll be charged interest on the amount you owe starting on the original due date.  

The misunderstanding about extensions is widespread, according to an April online poll of 1,000 U.S. adults, conducted by tax prep firm Jackson Hewitt, and it could be costly. If you owe federal taxes but don’t pay by the April 18 deadline, the IRS will tack on 0.5% of the amount for every month you’re late, up to a maximum of 25% of the bill. That applies even if you get an extension.

It’s still very important to request the extra time to file, though, if you need it, even if you can’t pay. That’s because the penalty for not filing on time–and not requesting the extension–is ten times as much as it is for not paying by the deadline: 5% per month of the amount owed instead of 0.5%, also up to a maximum of 25%.

It’s best to just file your tax return by the deadline even if you can’t pay right away, said Mark Steber, chief tax information officer at Jackson Hewitt, because you can usually get a payment plan from the IRS.

But whatever you do, get that extension request in by the deadline, Steber said. “Then you're only looking at one series of problems, not two that are compounded over time.”

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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