Filed a Tax Extension? Paying Late Can Be Costly

Tax extension filers are not alone

Well, Tax Day has passed, and most Americans are breathing a sigh of relief to have it over with. However, an estimated 10 million taxpayers still have unfinished business. If you filed a 4868, you probably already know that filing a tax extension does not give you more time to pay if you owe taxes.

That’s right, if you filed a tax extension but didn’t pay the full amount you owe, the clock is ticking. The  IRS is charging you interest. The interest the IRS charges on unpaid taxes is lower than the rate on most personal loans or cash advances, so don’t panic.

Tick tock, tick tock

If you filed a tax extension, you have until Oct. 15 to send your tax paperwork to the IRS. Most taxpayers also know that if you file a tax extension and you expect to owe money, you should estimate the amount you owe and send in that much. If your guess is high, you will have the difference refunded to you whenever you do file your taxes.

However, if your guess was low or if you didn’t have enough money to pay you could end up having to pay a penalty. If you didn’t pay anything at all, you could face real trouble — although you probably already know that.

No, not that kind of trouble

If you filed a tax extension but didn’t or couldn’t pay, you will not get sent to jail.

“You can go to jail for not filing a tax return,” said Greg Plechner, certified financial planner with Modera Wealth Management. “You can’t go to jail for not having the money to pay on your tax return.”

But there is both a late payment penalty and interest charged on unpaid taxes. The late payment penalty is 0.5 percent of the total tax owed per month. The interest rate on unpaid taxes is about 4 percent.

For people who have wages withheld and just owe a few hundred dollars, this won’t be too much of  a problem. However, for some it could get pretty pricey.

Warning to the self-employed

For those who are self-employed and must calculate their own taxes, underpaying or paying late can be expensive. If you are lucky enough to be self-employed and make a decent salary, the amount of taxes you have to pay can quickly get up into the tens of thousands of dollars. Four percent might be a low interest rate, but it adds up quickly

A lesson from the Secretary of the Treasury

Tim Geithner

Those who are working for international companies also have to calculate their own taxes. Even if you’re working for a company that is not based in the United States, you must pay social security and medicaid, which won’t automatically be taken out of your paycheck.

Our current Secretary of the Treasury, Tim Geithner, learned that the hard way. He had to go through rigorous scrutiny and criticism during his nomination process because he didn’t pay those taxes for a few years while working for the International Monetary Fund.

Ready, set, go!

So, long story short, if you file a tax extension and you owe money, don’t wait until Oct. 15 to find out how much. Get it done asap. You can file your taxes online for free, and quickly, at TaxAct.