Many people decide to file an extension for their taxes when they are approaching the April 15th deadline with little thought as to what this means for them. As the deadline for filing returns that requested an extension approaches, let's talk about what an extension means to the IRS. In short, an extension means you have an extra six months before filing your tax return late.

But what is the reality of opting to take an extension?

First and foremost, you will delay receiving any tax refund you are entitled to receive. While you will still receive that tax refund, you will not receive any interest the IRS likely earned on that money during the time they kept your money. The biggest concern impacting filers is that you do NOT get an extension on any amount you may owe either the IRS or your state. Even if you delay filing your return, any amount owed to the IRS or state is due to them by the April 15th deadline and will begin accruing penalties and interest beginning on that date.

What does this mean for you as a tax filer? 

If you know you will get a refund, you can breathe easily and take your time if you would like. If you are likely to owe or are unsure, it could be in your best interest to push for having the return prepared before April 15th. For some filers, making a payment on or before April 15th might be the safest option, even if filing an extension, to avoid penalties and interest.

How do you decide to pay or roll the dice and see what happens? 

How much is that penalty? Does everyone have to pay a penalty if they owe any taxes? These are all questions to discuss with your accountant or tax professional and are specific to your situation. Let's examine some of the basics. Some things to keep in mind:

1. Whether you want to take the chance or not is always your call. Regardless of the advice given by your accountant or tax professional, you are ultimately the only one financially responsible for any monies owed to the IRS or your state.
2. The IRS does not automatically assess a penalty just because you owe money.
3. The IRS can assess a penalty even if you pay on or before April 15th.
4. You are allowed to request the IRS waive any penalties and interest owed.

Wait, it may not matter if I get a penalty when I pay? Why did you start out telling me it matters if I pay on time or not? 

Whether or not the IRS assesses a penalty depends on several factors, which are technically related to when you pay but not necessarily related to the April 15th deadline. The IRS expects you to make a "good faith effort" to meet your tax burden promptly. “Good Faith Effort” means the IRS wants you to make sure you pay taxes before the last possible moment.  To meet the statutory burden, you must have paid either an amount equal to your prior year's tax obligation or within 10% of your current year's tax obligation.  You will not be penalized for underpayment if you have done this before or on the April 15th deadline. If you do not meet these limits, paying by April 15th won't keep you from owing a penalty for underpayment of taxes. There is a plus side to this situation: the IRS assumes all income is earned throughout the year by default, so if you are approaching December 31st and realize you won't have matched your prior year's obligation amount, then you can make a lump sum payment to the IRS and avoid an underpayment penalty.

Let's say you are assessed a penalty. Can the penalty be forgiven? 

Yes! There is a possibility your penalty qualifies for a waiver. If this is your first penalty and you meet other conditions, you may qualify for a First Time Abate Waiver. Certain circumstances qualify for a Reasonable Cause waiver. These are very individual to the particular taxpayer but include things like a fire or natural disaster, serious illness/death/unavoidable absence, or an inability to obtain the records needed to file. The other major category of waiver falls under statutory exceptions. This category would include things like having gotten inaccurate written guidance from the IRS, having lived in a federal disaster area, being involved in military operations in a combat zone, or having mailed your return on time, but the IRS did not receive it promptly. If you could meet the criteria for waiving a penalty, you should consult with your accountant or tax professional.

What’s the verdict?

An extension might be for you, but you must consider many factors related to your specific situation. Don't wait until the last minute to consult with a professional about your situation and make an informed decision. Many of us recall an applicable phrase from Saturday morning cartoons, but it was most commonly contributed to Sir Francis Bacon in the 1500s—"Knowledge is Power!"