Don't Let This Big Myth About Tax Extensions Trip You Up

At this point, if you haven't finished (or even started) your 2023 taxes, there's no need to panic. You still have a few weeks to get your return done by the April 15 filing deadline.

But what if you really don't think you'll be ready by April 15? Maybe you've had a hard time connecting with your accountant, or you're still chasing down tax forms that are essential to an accurate return. In that case, you may want to request a tax extension by April 15. If you do, you'll automatically be granted six extra months to get your return to the IRS.

And the best part of requesting a tax extension? You don't need to rack your brain to come up with an excuse. The IRS doesn't care if you need more time to get your taxes done because you were busy training your new rescue dog or you got stranded on an exotic island following a cruise excursion. None of that matters. If you ask the IRS for those six extra months, your wish will be granted. (If only everything else IRS-related were that easy!)

However, there's one big point of confusion that tends to arise in the context of tax extensions. And not getting to the bottom of it could cost you.

Know what a tax extension can and cannot do for you

If you're late filing your taxes and you don't owe the IRS money, guess what? Nothing bad really happens other than incurring a delay in your refund hitting your bank account. But if you're late with your taxes and you do owe the IRS money, you can be hit with a failure-to-file penalty. That can cost 5% of your unpaid tax bill for each month or partial month you're late with your return, up to a total of 25%.

And that's the benefit of requesting a tax extension. If you owe the IRS $5,000 and are a month late submitting your return, you could be charged $250. But with an extension on record, you won't be.

That said, a tax extension will not give you extra time to pay your tax bill. So if you don't pay the IRS what you owe by April 15, you'll accrue interest and penalties. Specifically, the failure-to-pay penalty equals 0.5% of your unpaid tax bill for each month or partial month you're late. So if you owe $5,000 and pay a month late, you'll be charged $25.

Try to pay up by April 15

It absolutely makes sense to request a tax extension if filing your return by April 15 this year seems unlikely. But it's also smart to try to estimate your 2023 tax bill and pay that sum to the IRS by April 15 to avoid interest and penalties on it.

Now you may be thinking, "Great advice, genius, but how would I know what to pay the IRS if I haven't finished my taxes?" And that's a fair point. One thing you can try to do is take an educated guess. If your income and tax payments made during the year in 2023 were similar to 2022, and you owed $1,500 the last time around, it's not unreasonable to assume that you'll owe about $1,500 this time around.

So let's say you pay that amount by April 15 and then, a month later, you discover that you really owed $1,550. And that point, you are looking at interest and penalties -- but on $50, not $1,550. That's a huge difference.

All told, a tax extension could help you avoid one very expensive IRS penalty. But don't buy into the myth that it gives you more time to pay. In fact, even if you decide to get an extension, log into your tax software and try to get your taxes done as close to April 15 as possible. That way, you can minimize the interest and penalties you accrue for failing to pay on time.