Tax Extensions Let You File Late — but Not Pay Late

Yikes!

It's March and you haven't even started getting your tax information together. Or you don't want to file your tax return because you think you will have a big tax bill and you don't want to pay for it now — or don't have the money to pay for it.

The good news is that you can file for a tax return extension. But is that a good idea?

Next Avenue asked tax experts for their insights.

Here are the 10 questions people most often ask about personal tax extensions, along with their answers:

"A tax extension is an extension to file taxes," says Susan Lee, an Enrolled Agent (someone allowed to represent taxpayers in meetings with the Internal Revenue Service) and Certified Financial Planner. For most people, that means the IRS has agreed to extend its deadline to file a federal tax return to October 15.

"You can file an extension yourself, or your tax preparer can do that for you," says Atiya Brown, CPA and president of The Savvy Accountant, in these ways:

• Online: Fill out and file IRS Form 4868 using your favorite commercial tax software or the IRS Free File program.

• By mail: Print and send Form 4868 to the IRS before the usual April 15 tax deadline.

In 2023, 18,511,015 Americans filed a Form 4868. That was 6.8% of total of 271,462,415 returns filed, according to IRS Publication 6292.

However, several of the experts, including David Goldweitz, CPA, a partner at KSDT CPA in Miami, said they filed extensions for 40% or more of their clients.

"The main reason we file tax extensions for our clients is because they are waiting for sophisticated investment tax forms," says Goldweitz.

While most essential tax documents, such as W-2s and 1099s, must be sent to individuals by the end of January, K-1 forms, which report the profit or loss at partnerships and entities that pass corporate profits, losses, deductions and credits through to their shareholders for federal tax purposes, do not have to be filed until September 15, including extensions, Goldweitz says.

Yes. This is the biggest misconception regarding tax extensions, according to all the experts interviewed.

"A tax extension is not an extension to pay what you owe. You must pay what you owe by April 15, 2025," says Lee.

"If our clients think they'll owe money, or aren't sure, we ask them to give us all of the tax information they have so we can compute an estimate of the taxes they will owe," says Goldweitz. "They should pay taxes based on that estimate, by April 15, 2025."

You will still need to file a return by October 15, 2025. When you file the return, it will reflect either a remaining amount due, or a refund, says Goldweitz.

The IRS offers two ways to avoid the penalty of underpayment of estimated tax by individuals:

• Your submitted tax return indicates that you owe less than $1,000, or

• You have paid at least 90% of the tax reported on the return for the current tax year or 100% of the tax reported on the prior year's return, whichever is lower.

This depends on when you file your tax return and pay taxes.

Here's an example provided by Goldweitz:

You get an extension and file your tax return on June 30, 2025.

You owe $5,000 in taxes, which are now subject to penalties and interest:

• The "failure to pay" penalty is 0.5% of unpaid taxes for each month or partial month the tax remains unpaid. Filing in June means you will be subject to April, May, and June penalties, or three months of penalties. For each month, you calculate the monthly penalty (0.5% of $5,000, or $25) and multiply that by the number of months or partial months you didn't pay the tax you owe. In this example, that is three months, so the penalty would be $75 in total.

• The interest is calculated each quarter by taking the federal short-term rate and adding three percentage points. The current IRS interest rate is 7%; on the $5,000 in our example, that works out to $350 for a full year, or 96 cents a day. Multiply that by the number of days you were late to pay (76 days) to find that you owe $73 in interest.

• The total of penalties and interest is $75 plus $73, or $148.

"There is no need to file Form 4868 for a tax extension, because the IRS typically grants extensions for people in those areas," says Paul Miller, CPA, founder at Miller and Company.

For example, individuals, households, and businesses in Los Angeles County qualify for tax relief due to the wildfires. Their deadline to file and pay 2024 returns has been extended to October 15, 2025.

"Our firm often recommends tax extensions to match tax information to the IRS tax transcripts," says Miller.

In July or August, the IRS releases tax transcripts containing all the reported tax information for each individual and business, says Miller. "It's a very effective way to determine if anything is missing on tax returns."

He says the two biggest omissions on tax returns his firm sees are gambling winnings and unemployment benefits.

"People often forget about winning money at gambling, and most states don't send out unemployment slips, and some states don't even send a 1099," says Miller. "If the states do send something in the mail, sometimes it's so small that it looks like fake mail, and clients throw it away."

"If you can't pay in full, estimate your taxes and pay as much as possible to reduce penalties," says Brown.

You can also set up a payment plan with the IRS, to pay your tax bill monthly for up to 72 months, he adds. Setup fees, penalties, and interest may apply.

"If you're facing a financial hardship, you may be able to settle your tax bill for less," says Brown.

Common hardship cases include the loss of a job or becoming a caregiver instead of working, both of which affect your income. You'll need to fill out an Offer in Compromise (Form 656), and include details about your financial situation.

"Tax extensions have a negative connotation," says Brown. "But they can be helpful, especially if you need extra time to figure out any issues with your return."

The bottom line: if it makes sense for you to get an extension, go for it.

Margie Zable Fisher is a freelance writer and author of The Cabernet Club, a novel about a new retiree learning it’s never too late to be who you might have been. Her website is margiezfisher.com. Read More