Using a tax extension

[Rose101]

In reading the IRS instructions for the extension to file, Form 4868, I cannot discern some facts about the costs of not paying the full tax owed with that form, by the April 15th deadline. 

With regards to interest on the unpaid balance, it does not specify the interest rate. Is that rate known or predictable?

For the penalty on the unpaid balance, it says you will be charged 1/2 of 1% for each month or part of a month that the tax is unpaid by the regular April 15th due date. Then it says: "The maximum penalty is 25%." What do they mean by the maximum penalty is 25%? Is that the maximum monthly penalty rate, or the maximum total penalty owed? (Thus, if it was the latter, and you owed $100, the penalty would not exceed $25, regardless of the number of months.)

It is clear that the interest cost continues till the balance is paid.

Thank you very much!

[TaxGuyBill]

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@Rose101 wrote:

it does not specify the interest rate. Is that rate known or predictable

For the penalty on the unpaid balance, it says you will be charged 1/2 of 1% for each month 

  What do they mean by the maximum penalty is 25%?

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Interest rate is announced and can change every quarter (see link).

At 1/2% per month, after 50 months of non-payment it will have hit the maximum 25% penalty.  In your example, $25.

[Rose101]

Thank you so much for your reply!

I have two more related questions.

If I file the Form 4868 by April 15th and have a tax balance unpaid, do I get to avoid the late filing penalty, despite the unpaid balance?

I found a source online that says the interest cost on the unpaid balance of tax is about 3% daily, and it is compounded daily. The IRS instructions don't say anything about charging and compounding daily, which would be a very rapid increase in cost. Do they do that? If not, do they compound monthly?

The reply from this morning said to see a link for the current interest rate used by the IRS, but there was no hyperlink, please point me in the right direction to where I can find it.

Thank you so much again, I really appreciate it!

[qbteachmt]

I googled:

IRA Quarterly interest rates

and got:

https://www.irs.gov/payments/quarterly-interest-rates

[sjrcpa]

Filing an extension but not paying the tax due will avoid the late filing penalty. But tehre will be a late payment penalty, plus interest.

IRS changes, or can change, the interest rates quarterly, but the calculations are done with daily compounding.

Interest is charged on the penalty owed, too.

[Rose101]

To: All Intuit Volunteers who kindly answered my questions:

Thank you very much to all who answered me, including sjrcpa, who confirmed in words, the link to the IRS materials on interest rates, sent by a previous Intuit email. I was very surprised that the IRS charges and compounds daily, starting at a rate of 8%. That makes an extension an impossibility, unless one has no other options. And then there is the penalty. I really appreciate getting the detailed process of how the interest was calculated and the further confirmation. I also very much appreciate the first volunteer who clarified what was meant by the 25% penalty. Your answers have made a very big difference to me.

Thank you!

Rose101

[sjrcpa]

I don't think you understand what compounds daily using an 8% annual rate means. 

[Rose101]

Hi sjrcpa, or whoever could kindly answer me,

Please explain what it means to compound daily at 8%. If I owed $100, how would that grow?

Thank you.

Rose101

[qbteachmt]

Compounding means keeps adding to the computation. Daily Compound means the interest is charged as 8/365, daily computed and added to the amount owed. The next day, the balance includes the prior interest, and it keeps getting added as each day is a late day. $100 is $108.33 at year end.

8% compound daily is equivalent to 8.32776% compounded annually.

Straight annual interest would be: $100 ends up at $108 at year end.

[BobKamman]

• If your return is over 60 days late, the minimum penalty for failure to file is the smaller of $485 (for 2024) or 100% of the tax required to be shown on the return.

[sjrcpa]

Throwing in more math.