There are a number of different penalties that can be assessed by the IRS (as well as state and local tax agencies) when we don’t follow all the rules. Here is a breakdown of the most common ones:
Late filing penalty: This is the one that is relieved by filing an extension. It is also the most onerous, maxing out at 25% of your tax due (so if you owe $2000 your penalty could be as much as $500).
Failure to pay penalty: This is the one that hits when you don’t pay your tax due by April 15. It also maxes out at 25% of the tax due, but accrues at a rate 1/10 of the late filing penalty.
Underpayment penalty: This is the penalty that hits when you do not make estimated payments or make those payments late. This is the most difficult penalty to parse, but is alleviated by making estimated payments or increasing your withholding. You can get hit with an underpayment penalty even if you got a refund. Let’s say you were supposed to make $9,000 in estimated payments. On April 10th you send in $10,000, then we file an extension. When we complete the return you are due a refund $1,000. All good right? Nope. Those estimates were due in equal payments during the year, so that big payment on April 10 was late.
Interest: Of course there is interest assessed on all of these penalties. So even if they max out if you ignore them your balance will increase as time goes on. And while we may be able to get some penalties abated, the interest on any tax due will not be abated.