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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.
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