Overview
Filing extensions and payment extensions are often confused, but they do very different jobs. A filing extension (most commonly requested on Form 4868 for individuals) postpones the deadline to file your tax return. A payment extension—commonly achieved through an IRS payment plan or short-term extension—gives you more time to pay taxes owed. Critically, a filing extension does not stop interest or failure-to-pay penalties from accruing if you don’t pay by the original due date. (IRS: Extensions of Time to File Your Tax Return)
In my practice as a CPA, I regularly see taxpayers file an extension to avoid a late-filing penalty but then be surprised by months of interest and a failure-to-pay penalty because they didn’t make an estimated payment by the original deadline. Understanding how each tool works helps you choose the right approach and minimize costs.
How a filing extension works
- What it does: Filing extensions (Form 4868 for individuals) extend the time to file—generally six months—so you can prepare and submit an accurate return. You must file Form 4868 by the original due date of the return (usually April for calendar-year taxpayers). (IRS: Form 4868)
- What it does not do: It does NOT extend the time to pay taxes owed. If you owe tax and don’t pay by the original due date, interest and the failure-to-pay penalty apply. (IRS: Extensions of Time to File Your Tax Return)
- How to request: Submit Form 4868 electronically (through tax software) or by mail by the regular due date. Many tax pros e-file the extension and instruct clients to pay any estimated tax due at the same time.
- Why use it: Common reasons include waiting for final K-1s, dealing with unexpected life events, or getting more time to gather accurate records.
Real-world tip: If you cannot pay in full, estimate and pay as much as you can with Form 4868 to reduce interest and penalties. Even a partial payment lowers the interest base.
How payment extensions and IRS payment plans work
Payment extensions come in several forms:
- Short-term payment plan (120 days or less): If you can pay within a few months, the IRS may grant a short-term extension with no setup fee. Interest and penalties still accrue until the balance is paid. (IRS: Payment Plan Options)
- Long-term installment agreement: This spreads payments over a longer period. There is often a setup fee (which the IRS sometimes waives for low-income taxpayers), and interest and penalties continue to accrue. Setting up a direct-debit installment agreement can reduce the failure-to-pay penalty rate. (IRS: How to set up an IRS payment plan)
- Offer in Compromise (OIC): A settlement program for taxpayers who can’t pay in full and meet strict eligibility rules; it’s difficult to qualify and requires full financial disclosure. (IRS: Offer in Compromise)
- Currently Not Collectible or Temporary Delay: If paying now would create financial hardship, the IRS may delay collection, but interest and penalties generally continue, and the debt remains.
Key point: Unlike a filing extension, a payment plan changes the timing of payment rather than timing of filing. Interest is charged from the original due date until the tax is paid in full. Interest is compounded daily at a rate set quarterly by the IRS; the rate equals the federal short-term rate plus three percentage points. (IRS: Interest on Underpayments)
Penalties and interest: what to expect
- Failure-to-file penalty: Generally 5% of the unpaid tax per month (or part of a month) up to 25% of the unpaid tax. Filing an extension prevents this penalty if you file by the extended due date. (IRS: Penalties)
- Failure-to-pay penalty: Generally 0.5% of unpaid tax per month, up to 25% of the unpaid tax. If you enter an installment agreement and payments are made by direct debit, the failure-to-pay penalty rate may be reduced to 0.25% per month while the agreement is in effect. (IRS: Penalties; IRS: Payment Plan Options)
- Interest: Accrues on unpaid taxes from the original due date and compounds daily. Interest continues until balance is paid. (IRS: Interest on Underpayments)
Example: You file Form 4868 to extend filing to October but pay nothing by April 15. You avoid the failure-to-file penalty if you file by the extended deadline, but interest and failure-to-pay penalties accrue from April 15 until you pay.
Practical steps to minimize cost and collection risk
- File the extension on time if you need the extra filing time. Use e-file for faster processing. (IRS: Form 4868)
- Estimate and pay as much of your tax due as you can by the original due date. That reduces interest and penalties immediately.
- If you can’t pay in full, apply for a payment plan online at IRS.gov. The IRS Online Payment Agreement tool is often the quickest option. (IRS: How to set up an IRS payment plan)
- Choose direct debit when possible—lower penalty rate and fewer missed-payment issues.
- Consider an Offer in Compromise only if you clearly cannot pay and meet IRS criteria; consult a tax professional. (IRS: Offer in Compromise)
- For state taxes: don’t assume state rules match the federal government. Many states handle extensions and penalties differently—check your state tax agency.
Common mistakes I see (and how to avoid them)
- Mistake: Filing an extension and thinking you automatically have more time to pay. Fix: Pay what you can by the original due date and set up a payment plan for the remainder.
- Mistake: Waiting to resolve tax issues until the extension deadline. Fix: Use the extension to gather documents and file timely by the extended date—don’t wait until the last minute.
- Mistake: Not checking state rules. Fix: Verify your state’s extension and payment rules; some states require separate forms or payments.
When filing an extension is the right move
- You need extra time to collect W-2s, 1099s, or K-1s.
- You are in the process of compiling complex business or rental records.
- You’re awaiting outside reports (e.g., foreign income statements) necessary for accurate reporting.
Action: File Form 4868 and make a good-faith estimate payment if you owe.
When a payment extension or plan is the right move
- You know how much you owe but cannot pay in full.
- You need predictable monthly payments and want to avoid enforced collection.
- You face temporary cash flow issues and can pay over time.
Action: Apply for an online installment agreement or short-term plan and consider direct debit.
Interlinks and further reading
- For guidance on managing quarterly tax obligations, see our guide to Estimated Taxes.
- For step-by-step instructions on arranging payments, see How to set up an IRS payment plan.
- For options that cover payment methods and IRS plan types, see IRS Payment Plan Options.
Frequently asked questions
Q: If I file an extension and then can’t pay, will the IRS file a lien immediately?
A: Not usually. The IRS typically does not file a federal tax lien immediately solely because you asked for an extension. However, unpaid taxes that remain unresolved for a long time can lead to liens or levies. It’s better to set up a payment plan and stay in communication. (IRS: Filing a Notice of Federal Tax Lien)
Q: Can I get an extension to pay if I’m deployed or in a disaster area?
A: The IRS provides special filing and payment relief in many disaster situations and for certain military deployments. These reliefs are announced on IRS.gov and may include extended filing and payment deadlines. Check IRS announcements for specific details.
Q: How does estimated tax fit into this?
A: If you’re self-employed or pay estimated taxes, keeping your quarterly payments up to date reduces the risk of owing a large balance at filing time and helps you avoid estimated tax penalties. See our guide on Estimated Taxes.
Bottom line
A filing extension buys time to prepare an accurate return but does not stop interest or failure-to-pay penalties on taxes due. A payment extension or installment agreement delays payment but usually leaves interest and penalties in place. The best practice is to file an extension if needed and pay as much as you can by the original due date, or immediately arrange a payment plan to reduce collection risk and lower costs.
Professional disclaimer: This article is educational and does not replace individualized tax advice. For help tailored to your situation, consult a qualified tax professional or CPA. Author: Licensed CPA with 15+ years advising individuals and small businesses on tax compliance and planning.
Authoritative sources:
- IRS. Extensions of Time to File Your Tax Return: https://www.irs.gov/payments/extensions-of-time-to-file-your-tax-return
- IRS. Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return: https://www.irs.gov/forms-pubs/about-form-4868
- IRS. Payment Plan Options: https://www.irs.gov/payments/payment-plan-options
- IRS. Interest on Underpayments: https://www.irs.gov/payments/interest-on-underpayments
- IRS. Penalties: https://www.irs.gov/payments/penalties