We are less than a week away from Tax Day. However, there are plenty of individuals that are not quite ready to file. In some cases, it’s just not possible to gather all of the required tax information by the due date.
If you are not prepared to file and need some more time, your best option is to file for an extension on Form 4868.
Those who file an extension will have until October 15th, 2024 to file their taxes without incurring “failure-to-file” penalties. However, the extension only provides extra time to file, not to pay your taxes. Regardless of whether you file for an extension, the tax you estimate is owed must still be sent by April 15, or you will incur penalties — and these penalties can add up quickly!
Two different penalties
If you both fail to file an extension and fail to pay your estimated tax, you will incur two separate penalties for failing to pay and failing to file. The failure-to-pay penalty runs at 0.5% for each month (or part of a month) the payment is late. For example, if payment is due April 15 and is made June 25, the penalty is 1.5% (0.5% times 3 months or partial months). The maximum penalty is 25%.
The failure-to-pay penalty is based on the amount shown as due on the return (less amounts paid through withholding or estimated payments), even if the actual tax bill turns out to be higher. Conversely, if the actual tax bill turns out to be less, the penalty is based on the lower amount.
The failure-to-file penalty runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you file for an extension on Form 4868, you’re not filing late unless you file after the October 15th due date. However, we want to reiterate that filing an extension doesn’t apply to your responsibility for payment.
If the 0.5% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part) so the combined penalty is 5%. The maximum combined penalty for the first five months is 25%. Thereafter, the failure-to-pay penalty can continue at 0.5% per month for 45 more months (an additional 22.5%), meaning the combined penalties can reach a total of 47.5% over time.
The failure-to-file penalty can be harsher because it’s based on the amount required to be shown on the return, and not just the amount shown as due.
Note: Credit is given for amounts paid through withholding or estimated payments. If no amount is owed, there’s no penalty for late filing.
Let’s look at an example. If a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15% of $5,000, which equals $750. If the actual liability is later determined to be an additional $1,000, the failure-to-file penalty (4.5% × 3 = 13.5%) would also apply to the additional $1,000 for an additional $135 in penalties or $885 in total.
There is also a minimum failure-to-file penalty that applies if a return is filed more than 60 days late. This minimum penalty is the lesser of $485 (for returns due after December 31, 2023) or the amount of tax required to be shown on the return.
Exemption in certain cases
The IRS may excuse both the failure-to-file and failure-to-pay penalties if you are filing late due to “reasonable cause.” Some events eligible for penalty relief include natural disasters, death or serious illness in your immediate family, or system issues affecting electronic filing or payment.
In addition to penalties, don’t forget that the government charges interest on late payments. Interest is assessed at a fluctuating rate announced by the government apart from and in addition to the above penalties. Moreover, in particularly malicious situations involving a fraudulent failure to file, the late filing penalty can jump to 15% per month, with a 75% maximum.
If you have questions about filing Form 4868 or IRS penalties, reach out to your Wegner CPAs tax advisor.
