Tax extensions are a wonderful thing for people who owe money to the IRS but don't have their returns ready in time for the filing deadline. The IRS isn't picky when it comes to granting extensions. All you need to do is request one, and you automatically get an additional six months to submit your return; you don't need to get creative or come up with a compelling reason to get that leeway. And during that extra half year, you avoid the failure-to-file penalty you might otherwise face.
The failure-to-file penalty is a doozy. It can amount to 5% of your unpaid tax bill for every month or partial month your return is late, up to a total of 25% of your overdue taxes. If you owe the IRS money and fail to submit your return in time for the original filing deadline, you'll face this penalty if you don't request an extension. But as long as you get your return in within the following six months, you won't incur those added costs.
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That said, just because you get a tax extension doesn't mean you should sit back and take your time in filing your taxes. There's another type of penalty that might really hurt you if you owe the IRS money but don't start tackling that bill right away.
The problem with being late with your tax bill
While a tax extension will give you more time to submit your tax return, it won't give you more time to pay your tax bill. If you owe the IRS money but don't fork it over by the tax deadline (which, this year, is April 15), you'll face a late payment penalty equal to 0.5% per month or partial month that your debt remains unpaid, up to a total of 25%. Therefore, just because you request a tax extension doesn't mean you should wait until that six-month period starts winding down to get moving on your return. The sooner you figure out how much you owe the IRS, the sooner you can pay that bill and avoid the late payment penalty.
Furthermore, if you get a tax extension and don't owe the IRS money, but rather, are due a refund, the longer it takes you to submit your return, the more you'll have to wait to get your hands on that cash. Now if you're in a good spot financially, you may not be in a particular rush to get your money, but if you're living paycheck or paycheck or grappling with high-interest debt, having that cash in hand sooner could help improve your financial picture.
Remember, too, that when you get a refund, it means you that lent the government a chunk of your income and missed out on earning money on that sum. And the longer you wait to get that refund, the more you lose out on an opportunity to earn interest on that cash.
Tax extensions are a great solution when circumstances don't allow you to get your taxes done on time. But don't use yours as an excuse to put off your return for another six months. Instead, get moving on your taxes as soon as you're able to -- if anything, it'll spare you from stressing out in mid-October.
