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Avoid Large IRS Penalties

Late-filing penalty

If you owe tax, fail to pay it by the due date, and do not file an extension, the IRS will charge you a 5% per-month penalty. This is known as the "late-filing" penalty and can reach a maximum of 25% of the amount you owe.

For example, if a married couple, Bob and Irene owe $5,000 in taxes, their maximum "late-filing" penalty would be $1,250 ($5,000 x 25%). If Bob and Irene file an extension on time, they avoid all of this penalty.

Late-paying penalty

There is a second type of penalty which filing an extension cannot avoid. This is the "late-paying" penalty and is ½% per month on the amount owed. In order to avoid this penalty, you must pay any amount you owe by the due date.

Interest on amount owed

In addition to the "Late-paying" penalty, IRS may charge you interest on any amount you owe. Presently, this is approximately 1% per month. In order to avoid interest, you must pay any amount you owe by the due date.

Summary

Filing an extension avoids the largest of the penalties, the "late-filing" penalty. Although the "Late-paying" penalty and interest cannot be avoided by filing an extension, they collectively amount to about 1.5% per month, the same as a standard credit-card.