Penalties

Failure-to-file vs. failure-to-pay penalties

The IRS charges two different penalties for late returns, and they are not the same size. Understanding the difference is the single best reason to file an extension on time.

Failure to file

The bigger one

Charged when you don't file your return (or an extension) by the deadline. It is generally 5% of the unpaid tax per month (or part of a month) the return is late, up to a maximum of 25%.

TODO(verify): confirm current rate, cap, and any minimum penalty for returns over 60 days late.

Failure to pay

The smaller one

Charged when you don't pay the tax you owe by the deadline. It is generally 0.5% of the unpaid tax per month (or part of a month), and it also accrues up to a maximum of 25%. Interest is charged on top.

TODO(verify): confirm current rate, cap, and interaction when both penalties apply.

Why an extension matters

The failure-to-file penalty is generally ten times larger than the failure-to-pay penalty (5% vs. 0.5% per month). Filing a timely extension removes the failure-to-file penalty by giving you more time to file — even if you can't pay everything yet.

The takeaway: if you can't file on time, file an extension. If you can't pay in full, pay as much as you can with the extension to shrink the smaller failure-to-pay penalty and the interest that accrues on the balance.

A simple example

Say you owe $10,000 and are three months late. Without an extension, the failure-to-file penalty alone could be roughly $1,500 (about 5% per month). With a timely extension, you avoid that penalty; the failure-to-pay penalty on the same balance over three months is generally far smaller — on the order of $150 — plus interest. The exact figures depend on current IRS rates and how the penalties interact. TODO(verify): confirm the math against current-year rates before publishing as fact.

What an extension does not do

  • It does not extend the time to pay. Tax owed is still due by the original deadline.
  • It does not stop interest from accruing on an unpaid balance.
  • It does not eliminate the failure-to-pay penalty if you owe and don't pay.

For the dates that trigger these penalties, see the deadlines guide.

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Disclaimer: penalty rates are summarized for general guidance, not tax advice. Confirm current IRS rates for your situation.