Got a Tax Extension? Here's Why You Might Still Want to File Your Return in May

Tax returns were due this year on April 15. But if you weren't ready with your 2023 return at that time, you hopefully requested an extension.

The good thing about a tax extension is that it gives you six extra months to get your return over to the IRS without incurring a failure-to-file penalty. And that's huge, because that particular penalty amounts to 5% of your unpaid tax debt associated with your late return per month or partial month you're late with your filing, up to 25%. 

As a point of clarity, you won't be penalized for a late tax return if you're owed money from the IRS. Let's say you overpaid your taxes by $3,000 and file your taxes two months late. That means the IRS gets to keep your $3,000 an extra 60 days. In that regard, you're penalizing yourself, so the IRS isn't going to pile on.

But let's say you owe the IRS $3,000 and you're a month late submitting your tax return. The agency is going to tack on a 5% penalty for not submitting your taxes by April 15, forcing you to pay an additional $150. Ouch. So if you're ever going to be late with a tax return, it always pays to get an extension to take the failure-to-file penalty off the table.

Still, you don't want to sit on a tax extension you recently got for too long. In fact, if you got an extension last month, you may want to file your taxes in May for one big reason.

Limit the interest and penalties that accrue against you

If you got a tax extension this year, it means you have until Oct. 15 to file your 2023 taxes without having to worry about a failure-to-file penalty. But if you owe the IRS money from 2023, the longer you wait to pay your tax bill, the more interest and penalties you'll accrue. And you probably won't know what your tax bill amounts to until you file your return and finalize those numbers.

Now thankfully, the late payment penalty isn't as harsh as the failure-to-file penalty initially. It amounts to 0.5% per month or partial month your payment is late, up to 25%. 

To illustrate the difference between the late payment penalty and the failure-to-file penalty, with the former, if you owe $3,000 and are a month late, your penalty will total $15. With the latter, you'll owe $150, or 10-times as much. 

But still, you don't want to keep adding to your total IRS bill by letting that late payment penalty accrue. And you don't want to keep accumulating interest on top of that. 

So if you were given more time to finish your taxes, use the second half of May to get the job finished and be done with it. If you wait until October to submit your taxes and pay your bill, you might end up having to send the IRS a lot more money.

There are options if you can't pay in full

Let's say you manage to finish your tax return in May and find that you owe the IRS $750. That's a problem if you don't have that money on hand in your bank account. But you do have options for paying that debt off over time.

One route you can take is to charge your tax bill on a 0% interest credit card and pay it off over time. However, the IRS will tack on a fee on top of that, so you'll be paying a bit extra either way. The amount of that fee is 1.82% to 1.98% of your tax bill, or a minimum of $2.50.

Another option is to sign up for an IRS installment agreement to pay off your bill over time. This won't get you out of interest and penalties on your overdue tax bill, but you'll be considered current on your IRS payments if you stick to your agreement. This option may be a better one if you already have a lot of credit card debt, since adding to an existing balance could cause damage to your credit score.

You may be inclined to take your time finishing your taxes if you got an extension last month and have until mid-October to get the job done. But it's really in your best interest to file your 2023 tax return in May if you're able to do so.