While many people file extensions at some point, mistakes can lead to penalties, missed opportunities, financial stress, and lost money.
Understanding how to handle your extension is crucial; some guidelines must be followed on or before the deadline, even if you’re filing an extension.
This is especially important for those affected by Hurricanes or wildfires, who may qualify for other disaster relief provisions.
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1. Failing to file an extension when you can’t pay
One of the costliest tax mistakes is skipping a filing extension when you can’t pay. Many assume there’s no point in filing without full payment — but that triggers steep penalties.
The late-filing penalty is 5% per month (up to 25%) of unpaid taxes.
The late-payment penalty is just 0.5% per month, also capped at 25%.
If you owe $10,000:
- Filing late could cost you $500/month, up to $2,500
- Paying late adds only $50/month, up to $2,500
File Form 4868 on time — even without a payment — to avoid the harsher penalty.
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2. Misunderstanding extension deadlines in disaster areas
The IRS offers special tax relief that automatically extends certain deadlines for victims of Hurricane Helene and the Los Angeles wildfires. Still, many affected taxpayers miss out due to confusion over how the provisions work.
If you’re in a federally declared disaster area, you may qualify for an automatic extension without filing Form 4868 — but that doesn’t mean the process should be ignored.
Tax experts recommend checking the IRS disaster relief page and consulting a professional, as requirements can vary depending on the type of disaster and your location.
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3. Assuming an extension gives you more time to pay
One of the most common tax extension myths is that it gives you more time to pay. In reality, extensions only grant more time to file, not to pay what you owe.
Taxes are still due by the original deadline, even if you file an extension. When submitting the extension request, you must estimate and pay your tax liability to avoid late-payment penalties and interest, which are currently around 8% annually.
Advisors suggest paying at least 90% of your expected taxes to avoid penalties, especially given potential market volatility in 2025 impacting income estimates.
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4. Overlooking Q1 estimated taxes due simultaneously
A particularly costly blunder occurs when taxpayers focus so intently on their extension for the previous year that they forget entirely about first quarter estimated taxes for the current year — both due on the same date, April 15.
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Failing to make this payment can trigger underpayment penalties, and the IRS has increased interest rates on underpayments in recent years, making this oversight even more expensive.
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5. Missing the Section 475 MTM election deadline
A critical deadline for eligible traders with trader tax status coincides with the tax extension filing: the deadline to elect Section 475 mark-to-market accounting.
This election must be filed by the tax filing deadline for individuals and C-corporations, usually 30 days earlier for partnerships and S-corporations.
Many traders don’t realize that this election statement must be attached to your timely filed tax return or your extension request. Missing this deadline means losing the opportunity until the following tax year.
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6. Rushing to file after submitting the extension
Many taxpayers stress over filing quickly after requesting an extension, even when waiting for corrected 1099-Bs or K-1s is the smarter move.
Seasoned filers know the real deadlines are often in September for pass-throughs and October for individuals. Rushing can lead to amendments and unwanted IRS attention.
Many accounting firms now prefer clients file extensions to allow for more accurate, complete returns.
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7. Being too aggressive and focused on a tax refund
While it might be tempting to file an extension to claim as many deductions as possible, large refunds year after year will draw scrutiny.
The IRS uses sophisticated software to identify taxpayers who consistently generate large refunds as potentially being overly aggressive with deductions or credits.
For maximum deductions, tax professionals and financial advisors can help you identify the best route to avoid owing the IRS and claiming the most deductions.
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8. Overlooking retirement plan funding deadlines
Many taxpayers don’t realize that filing an extension also extends the deadline for funding certain qualified retirement plans, offering flexibility for cash flow and tax planning.
The funding deadline is extended to October for plans like SEP IRAs, Solo 401(k)s, and defined benefit plans. However, traditional and Roth IRAs still have an April deadline.
The extended time is especially valuable for self-employed individuals and small business owners, including traders, who need more time to calculate contributions based on fluctuating income.
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9. Neglecting state tax extension requirements
While federal extensions get much attention, many taxpayers overlook state-specific requirements. Some states automatically grant extensions with a federal filing, while others require separate forms and payments.
The complexity has grown with the rise of state pass-through entity (PTE) tax elections, which now exist in over 30 states as workarounds to the federal SALT deduction cap. These elections may have differing deadlines and extension rules.
Tax professionals warn that states are less lenient than the IRS with penalties, so it’s important to follow state-specific guidelines.
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Navigating extensions with confidence
Understanding tax extensions isn’t just about avoiding penalties—it’s about strategically managing your tax situation to maximize benefits and minimize stress.
Remember that extensions are not procrastination—they’re a legitimate tax planning tool used by financial professionals and sophisticated taxpayers to ensure accuracy and maximize tax benefits.
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