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Extension to File & Tax Penalties Explained

1. Types of Tax Penalties

 IRS may impose the following penalties on individual tax returns:

  • Failure-to-File Penalty

  • Failure-to-Pay Penalty

  • Underpayment of Estimate Tax Penalty

2. Failure-to-File Penalty

Individual income tax return is due on April 15th. IRS charges failure-to-file penalty on tax returns filed after this due date. The penalty is 5% of the tax due, and it is charged monthly up to 5 months or maximum penalty of 25%.

Taxpayers can request extension of time to file by submitting Form 4868; this extends the deadline to October 15th. Taxpayers who properly filed Form 4868 will not be charged failure-to-file penalty during the 6-month extension period.

3. Failure-to-Pay Penalty

All tax payments are due on April 15th and the due date cannot be extended. Any expected tax due must be submitted to IRS along with Form 4868 before April 15th to avoid failure-to-pay penalty.

The penalty with related interest is roughly 1% a month on unpaid balance.

4. Example

A taxpayer, A, files his income tax return and pays the tax due as below:

  • A filed Form 4868 on 4/10/2022, the due date is extended to 10/15/2022.

    • A expects his tax due to be $15,000.

    • Still, A pays only $10,000 along with the Form 4868.

  • The taxpayer files his income tax return on 8/5/2022 with the total tax due of $12,000.

  • Remaining due of $2,000 is paid after deducting the $10,000 paid upon extension filing.

The taxpayer will be charged no failure-to-file penalty. However, failure-to-pay penalty will be charged on the $2,000 unpaid balance for the period from 4/15/2022 to 8/5/2022.