6 Common Mistakes to Avoid When Filing an Income Tax Extension

An income tax extension is a formal request to the Internal Revenue Service (IRS) for additional time - typically 6 months - to prepare and submit your income tax return.

Filing for an income tax extension can be a lifeline for those who need a little extra time to file their taxes.

However, there are common mistakes people make when filing for an income tax extension that can result in the extension being rejected, or even in penalties and fines.

Keep reading to learn more about these common mistakes and how to avoid them.

6 Common Mistakes To Avoid When Filing for an Income Tax Extension

1. Misunderstanding the Purpose of the Extension

Mistake: Many individuals mistakenly believe that securing a tax extension automatically extends the time to pay their taxes.

However, an income tax extension only gives you additional time to file your tax return, not to pay any taxes owed.

Potential Fines/Penalties: The IRS imposes penalties for failing to pay taxes. The failure-to-pay penalty is 0.5% of the unpaid taxes per month or part thereof that taxes remain outstanding, capping at a hefty 25%. If that wasn’t enough, interest compounds daily on the outstanding amount, usually around 3% to 4% annually.

Example: Meet Sarah, a diligent taxpayer who finds herself overwhelmed with various commitments. Juggling multiple responsibilities, Sarah realizes she needs more time to file her tax return. Filing for a tax extension seems like the perfect solution to alleviate her stress.

However, Sarah assumes that by securing an extension, she gets additional time to pay her income taxes. As a result, Sarah holds off on paying her taxes, assuming there won't be any penalties or consequences.

Soon, Sarah finds out that the tax extension solely extended the time to submit her tax return, not to pay her taxes.

Her mistake results in penalties and accrued interest on the taxes she owes, adding unnecessary financial strain.

Solution: Remember that filing an extension does not delay the payment of taxes.

Estimate your tax liability accurately and pay any taxes you owe by the initial deadline to avoid interest and penalties. If you're unsure about the amount you owe, use last year's tax return for reference or search for estimated tax calculators online.

2. Filing the Wrong Form

Mistake: Another misstep is selecting the wrong form.

It's easy to inadvertently opt for the wrong one, especially when there are separate forms for different entities like businesses or individuals.

Potential Fines/Penalties: Submitting the wrong form invalidates the extension request.

This mistake can trigger penalties for late filing if the correct form isn't submitted before the original deadline. The failure-to-file penalty is 5% of the unpaid tax amount for each month the return is late, up to a maximum of 25%.

Example: Say hello to Sarah again, our freelance friend. In her earnest attempt to secure an extension, she filled out Form 7004, assuming it was the right document for an individual tax extension.

Unfortunately, Form 7004 is intended for businesses, not individuals like Sarah. Despite her efforts to file for an extension, Sarah's incorrect submission leads to her extension request being rejected, causing delays in her tax filing process and late-filing penalties.

Solution: It's crucial to select the form that corresponds to your specific filing status or entity type. For individuals like Sarah, Form 4868 is the standard choice, whereas corporations and partnerships need to use Form 7004.

To ensure accuracy, leverage tools like reliable tax extension software to confirm the appropriate form. Be sure to review the instructions outlined in the form to avoid incurring penalties and delays in processing your extension request.

3. Filing the Extension Late

Mistake: Another common mistake is not filing the extension request by the deadline. Income tax extensions should be submitted by the original tax deadline, usually April 15th.

Potential Fines/Penalties: As a reminder, the IRS enforces penalties for not filing or paying taxes. The failure-to-file penalty is 5% of unpaid taxes per month, maxing out at 25%. The failure-to-pay penalty is 0.5% of the unpaid taxes per month, also maxing out at 25%. On top of these penalties, daily interest adds up.

Example: Sarah believes securing an extension means she can submit her extension form even after April 15th. Since her workload is piling up, she misses the original deadline, and instead submits her extension request on May 5th.

However, since this is past the filing deadline and Sarah hasn't filed or paid her taxes yet, she'll now be hit with both the failure-to-file and failure-to-pay penalties on top of the taxes she owes.

Solution: Be sure to submit the extension form by the original tax deadline, which is usually April 15th.

Set reminders, and use online tax extension software to avoid paper-filing delays.

4. Not Estimating Your Tax Liability Correctly

Mistake: When filing for a tax extension, you must estimate and pay your tax liability for the prior year. Submitting an incorrect or inaccurate estimated tax amount can result in penalties.

Potential Fines/Penalties: The IRS might impose penalties for underestimating the tax liability. If your estimated tax payment is less than 90% of the actual tax liability or doesn't meet specific IRS criteria, you might face penalties for underpayment.

The penalty rate varies and is calculated based on the underpayment amount and time passed since the tax due date.

Example: Sarah mistakenly assumes that she doesn't need to provide an accurate estimate of her tax liability when filing her extension. She's aware that if she owes less than $1,000 in total tax after subtracting withholding and refundable credits, or if she pays at least 90% of the tax shown on her return for the current year, she won't incur penalties. Yet, she neglects to assess her tax liability carefully, and mistakenly assumes she'll fall within these safe harbor rules.

When she later files her taxes, Sarah realizes she underestimated her tax liability. Consequently, she now has to pay penalties, in addition to the remaining tax amount she owes, due to her underestimating her tax liability when requesting the extension. 

Solution: Accurately estimate your tax liability when filing for an extension.

Utilize your prior year's tax return as a reference and adjust for any changes in the current tax year, such as income variations, deductions, or credits.

Seek guidance from a tax professional or use IRS-provided tools to make an informed estimation. It's crucial to make a reasonable and close approximation to avoid potential penalties.

5. Not Paying Your Taxes

Mistake: The most common misconception is that filing for an income tax extension automatically grants you extra time to pay your taxes. In reality, getting an extension solely extends the deadline to file your tax return, not to pay your taxes due.

Potential Fines/Penalties: As highlighted with the other common pitfalls, the IRS imposes penalties for late payment of taxes. The late-payment penalty is 0.5% of the unpaid tax per month or part of a month the tax remains unpaid, up to 25% of the total tax owed. Additionally, interest accrues on the unpaid amount until it's fully settled.

Example: As tax day approaches, Sarah realizes she isn't quite ready to file.

In a rush to gain more time, Sarah files for a tax extension, assuming it will buy her extra time to submit her tax return and pay her taxes.

When Sarah finally files her taxes by the extended deadline, she's in for a surprise. She's accrued penalties and interest on her unpaid taxes, leading to a larger tax bill than anticipated. Her mistake not only cost her in fines but also added to the financial strain she was trying to alleviate by securing the extension in the first place.

Solution: Estimate your owed taxes accurately and make payments by the original deadline, even if filing for an extension.

Here are some ways to make a reasonable estimate:

1. Prior Year's Taxes: Use your previous year's tax return as a baseline, and adjust for any anticipated changes, such as increased income or deductions.

2. Use Tax Software or Calculators: Tax preparation software can often help you estimate the taxes you'll owe. These tools take into account your income, deductions, credits, and other factors to give you an estimated tax liability.

3. Percentage of Income: Some individuals use a percentage of their income to estimate their taxes. They calculate an estimated tax liability based on a fixed percentage of their income, adjusting for any changes in their financial situation.

4. Consult a Tax Professional: A tax professional or accountant can provide tailored guidance based on your specific financial circumstances. They can help you calculate a more accurate estimate and offer insights into potential deductions or credits you may be eligible for.

5. IRS Form 1040-ES: The IRS provides Form 1040-ES, which includes a worksheet to estimate taxes. It helps in forecasting taxes for the current year based on income, deductions, and other factors.

Remember, the IRS expects individuals to pay either 90% of the current year’s tax liability or 100% of the prior year’s tax liability (whichever is less) when estimating taxes to avoid penalties. Adjustments can be made on subsequent tax filings if your estimates were not entirely accurate.

6. Not Keeping Confirmation Records

Mistake: Individuals often overlook the importance of keeping confirmation of their filed tax extension. Some assume that once they've submitted the extension, there's no need to keep any record or proof of the filing.

Potential Fines/Penalties: Without proof of filing the extension, you might encounter challenges if the IRS disputes the filing. In the absence of confirmation, you may face penalties or be considered late in filing your taxes, leading to potential fines and interest charges. In short, keep documentation of everything – you never know when Uncle Sam will come knockin’.

Example: Sarah submits Form 4868 electronically through the IRS website, sighing in relief as she believes her extension is set. However, Sarah encounters an unforeseen issue when the IRS states they have no record of her extension request.

Perplexed, she tries to retrieve a confirmation number or a receipt, only to realize she hadn't saved or printed any proof of her filing.

Unfortunately, without that confirmation, Sarah is out of luck. She has to refile for the extension, resulting in a delay and heightened anxiety about whether the IRS will accept the late submission.

Solution: To prevent this issue, it's vital to retain proof or confirmation of your filed tax extension. Here's how you can ensure you have the necessary documentation:

1. Confirmation Number: If you file electronically through the IRS website or an authorized e-file provider, you may receive a confirmation number. Save this number in a secure place as proof of your extension request.

2. Receipts or Emails: Some e-file services or tax preparers send email confirmations or receipts upon successful submission. Keep these emails or printed copies of the receipts in your records.

3. Print Copies: If you file a paper extension by mail, make copies of all the documents before sending them. Keep these copies in a safe location for future reference.

4. Notate Your Calendar: Additionally, mark the date you filed for an extension on your calendar or planner. This serves as an extra reminder and can be useful in case of any disputes or questions about your filing.

5. Create a File: Establish a dedicated file or folder for tax-related documents, including extensions. Store all confirmation numbers, receipts, or any proof of filings in this designated location for easy access and safekeeping.

By following these steps and retaining the necessary documentation, you'll have solid evidence of your filed tax extension, eliminating any potential disputes or uncertainties regarding the filing.

In Conclusion

There you have it—a list of common mistakes when filing a tax extension and how to avoid them.

Remember, tax season might seem like a daunting beast, but with an income tax extension, you can give yourself the extra time you need to get everything done right. Start filing your extension today with IRSExtension.online.

Here's to a stress-free tax season filled with smooth filings, on-point extensions, and a sense of accomplishment.

Happy filing!