So how did tax season go for you this year? Did you get them all done by February 1 and spend your refund by February 2? Or did you lose track of time and barely beat the April 18 deadline to file? Perhaps you missed the deadline entirely and ended up having to file for an IRS extension. If you find yourself in this category, what’s your plan now? Have you already submitted, or are they still on hold while you say to yourself: “What’s the rush? I have till October.” Before you go waiting till the last minute again, which is likely how you got into this situation in the first place, you should think again. In other words, don’t wait to file your return even if you did get an extension.
Getting a Refund – Why Wait?
If you are due for a refund, then there is not a lot of harm done in filing an extension. However, you are letting the government earn interest on your money while it could instead be earning interest for you. However, there won’t be any penalties for collecting your refund later than usual, other than some interest and not having that money at your disposal. Contrastingly, if you owe money to the IRS, then don’t be fooled into thinking that an extension will save you from the possible penalties and interest the IRS is going to charge you. While you will get more time to file your return, you don’t get any extra time to pay off your tax bill. The IRS generally will require at least 90% of what you owe for the year by the normal tax due date (April 18th this year), or 100% of the tax shown on the return for the prior year (whichever is smaller). The IRS refers to this as the Safe Harbor Rule. Also note, that if you end up owing $1,000 or less after withholding and estimated taxes are considered, then you will not pay an underpayment penalty.
Interest and Penalties Often Seen with an IRS Extension
So what happens when you owe the IRS money, and you are late to file your return? For starters, you will pay interest on the amount you owe, and the interest meter starts ticking as soon as the April deadline passes. For every month you are late paying the money you owe, you will pay 0.5 percent interest on the amount you owe starting on the day following the April deadline along with interest charges (currently 4%). That might not sound like a lot, but it can start to add up over time, especially if you owe thousands of dollars in taxes.
If you owe the IRS a significant amount, they will add extra penalties to your bill for being late. That means you could end up paying a lot more than what you originally owed. So it pays to be proactive now and not procrastinate any longer, even if you’ve filed an extension that allows you till October 15th to get done.
A Vicious Cycle
If you still are not convinced, and you need another reason not to wait around to file your tax return after you filed for an IRS extension, then how’s this? Consider carefully the position you find yourself in at the moment. For whatever reason, you weren’t prepared enough, and you didn’t get your 2016 return filed on time, which has led you to file for an extension. Now, if you decide to wait till the last minute again and file in October where does that leave you for next year? Chances are, if you didn’t do what it takes to be ready this year, then you will probably fall into the same trap again next year. Thus, you will likely get trapped in a vicious cycle and continue to fall behind the 8-ball every year come tax time. So, if you fell behind and had to file an extension this year, the best thing to do now is file as soon as you can and get back on track.