Taxpayers who can’t get their paperwork in order by the extended May 17 filing deadline for their 2020 taxes can buy themselves a little more time by requesting an extension. This gives you an additional six months to complete your return and send it off to the IRS. Oct. 15, 2021 is the cutoff date for filing if you requested an extension and it’ll be here before you know it. With the tax extension deadline drawing closer, here’s what you need to be aware of when you’re getting your documents together.
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Penalties and Interest May Be Due
An extension of time to file isn’t the same as an extension of time to pay and if you have an outstanding tax bill, your balance is likely to be inflated by penalties and interest. That’s because the IRS charges a failure-to-pay penalty of 0.5% of the total amount of tax owed for every month or partial month it goes unpaid, up to a maximum of 25%. Taxpayers who filed an extension and paid at least 90% of the balance due when submitting their request generally aren’t subject to the penalty.
If you end up missing the October filing deadline, a separate failure-to-file penalty also applies. This penalty is much steeper, at five percent of the original amount of tax owed per month or partial month and it’s also capped at 25%. If you owe the failure-to-pay penalty, the late filing penalty is offset by 0.5% each month. The total maximum amount you can be charged for both penalties adds up to 47.5%, which could add hundreds or even thousands of dollars to your tax bill, depending on what you originally owed.
On top of the penalties, you’ll also have to pay interest on what you owe. As of the first quarter of 2020, the interest rate is 3%. However, this rate changes every quarter and has ranged from 3% up to 6% over the past few years. Interest compounds daily and is assessed based on the total amount owed, including penalties.
Help Is Available If You Can’t Pay
The IRS recognizes that there are certain situations where you may not be able to meet your tax obligations on time. If you file your return by the extension cutoff but you can’t pay the full amount, you may be able to make monthly payments towards the balance through an Installment Agreement. Qualifying for a payment plan is fairly straightforward; you have to be up-to-date on your tax filing and owe less than $50,000. If you’re eligible for an installment agreement, you’ll have 72 months to pay back what you owe.
As an added benefit, you may be able to get some or all of the penalties waived if you can demonstrate that your inability to file or pay on time was due to circumstances beyond your control. As long as you haven’t had any previous tax trouble and your returns for the prior three years were paid on time, the IRS may consider granting you an abatement, which can significantly reduce what you have to pay.
You May Have More Time to File
Certain taxpayers may be able to put off their tax filing beyond October. If you’re currently living outside the country, for example, you may be able to get an additional extension through December. Special rules may also apply for military members and individuals who are serving in a combat zone.
Uncle Sam May Keep Your Refund
Generally, you don’t need to file a federal extension if you’re owed a refund unless you’re also planning to request a state extension. While that means you won’t have to worry about getting hit with a failure-to-file penalty, you can’t put off your filing forever. The IRS gives you three years from the original filing deadline to submit your return and claim a refund. If you don’t take action before then, Uncle Sam gets to keep your money. If you applied for state and federal extensions and you’re expecting a refund, it doesn’t make sense to delay your filing any longer.
Time is running out to get your return filed so it’s in your best interest to act quickly, especially if you owe the IRS money. Procrastinating only increases the amount of penalties and interest due, which can take an even bigger bite out of your wallet.
Tips to Help You Survive Tax Season
- A financial advisor can help optimize your tax strategy for your financial goals. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
- Not sure what you’ll owe come tax time? Plug your information into our income tax calculator. You can find the exact breakdown of what you owe for federal income taxes.
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