Filing a tax extension gives you six extra months to submit your return, but it does not give you extra time to pay the tax you owe. If you filed Form 4868 by April 15, your extended deadline to file is October 15. But any tax due was still owed by April 15, and the IRS has been charging penalties and interest on the unpaid balance since that date. This catches many taxpayers off guard, especially business owners and people with multiple income sources who did not know exactly how much they owed when the original deadline passed.

Below is a breakdown of how the IRS calculates tax extension penalties, what Arizona adds on top, and the specific steps you can take to reduce or eliminate these charges.

What an Extension Does (and Does Not) Do

An extension filed through IRS Form 4868 moves your filing deadline from April 15 to October 15 for individual returns. It is automatic, meaning the IRS does not require a reason. However, the extension only covers the act of filing. It does not extend the deadline for payment. Taxes owed are still due by the original April 15 deadline, and both penalties and interest begin accruing on any unpaid balance starting April 16.

The IRS is explicit on this point: "An extension provides extra time to file, not additional time to pay." If you cannot pay the full amount by April 15, paying as much as possible by that date will reduce the penalties that accumulate during the extension period.

The Three Penalties That Can Apply

Taxpayers who file an extension but do not pay enough by April 15 can face up to three separate penalties. Understanding which ones apply to your situation is the first step toward resolving them.

Failure-to-Pay Penalty

The failure-to-pay penalty is 0.5% of the unpaid tax for each month (or part of a month) the balance remains outstanding, up to a maximum of 25%. The IRS charges a full month's penalty even if you pay before the end of that month. For example, if you owe $5,000 and pay nothing for four months, you would accumulate $100 in failure-to-pay penalties (4 x 0.5% x $5,000) before interest is added.

Two adjustments can change this rate:

Failure-to-File Penalty

If you miss the extended October 15 deadline entirely (meaning you neither filed your return nor requested a further extension), the failure-to-file penalty kicks in. This penalty is 5% of the unpaid tax for each month (or part of a month) the return is late, up to 25%. For returns due after December 31, 2025, there is also a minimum penalty of $525 (or 100% of the tax owed, whichever is less) for returns more than 60 days late.

When both the failure-to-file and failure-to-pay penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty. The combined maximum for any single month is 5%.

Underpayment of Estimated Tax Penalty

The underpayment of estimated tax penalty under IRC Section 6654 applies if you did not pay enough tax throughout the year via withholding or quarterly estimated payments. This penalty is calculated as interest on the shortfall for each quarter, using the federal short-term rate plus 3 percentage points. For 2026, that rate has been approximately 7% to 8% annualized, depending on the quarter.

This penalty is separate from the failure-to-pay penalty and can apply even if you file on time. The IRS calculates it automatically when your return is processed.

Safe Harbor Rules: How to Avoid the Estimated Tax Penalty

The IRS provides safe harbor thresholds that, if met, eliminate the underpayment penalty entirely. You only need to meet one of the following:

  • Owe less than $1,000: If your total tax minus withholding and refundable credits is under $1,000, no penalty applies.
  • Pay 90% of current-year tax: If your withholding and estimated payments cover at least 90% of the tax shown on your current-year return, no penalty applies.
  • Pay 100% (or 110%) of prior-year tax: If your payments equal at least 100% of the total tax shown on your prior-year return, no penalty applies. If your prior-year adjusted gross income exceeded $150,000 ($75,000 if married filing separately), the threshold increases to 110%.

These safe harbors are calculated using Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts). Many taxpayers find the prior-year method easiest because it relies on a known number from the previous return rather than a projection of current-year income. You can review the Form 2210 instructions for the full calculation.

Interest on Unpaid Tax

In addition to penalties, the IRS charges interest on any unpaid tax from the original due date until the date of payment. The interest rate is the federal short-term rate plus 3 percentage points, compounded daily. Unlike penalties, interest generally cannot be abated (except in narrow cases involving IRS error or delay under IRC Section 6404). Paying as much as you can, as early as you can, is the most effective way to limit interest charges.

How to Get Penalty Relief

The IRS offers several paths to reduce or eliminate penalties after they have been assessed. Penalty relief does not apply to interest charges, and it does not erase the underlying tax liability. But it can save you a meaningful amount.

First Time Abatement (FTA)

The First Time Abatement program provides administrative relief from the failure-to-file, failure-to-pay, and failure-to-deposit penalties if you have a clean compliance history for the prior three tax years (meaning no penalties assessed, all returns filed on time, and you are current on payments or in a payment arrangement). You can request FTA by calling the number on your IRS notice or by submitting Form 843.

Automatic Exemption from Penalty (AEP)

Beginning summer 2026, the IRS is rolling out a new program called Automatic Exemption from Penalty. Under AEP, if you file or pay late but have three years of timely compliance history, the IRS will not assess the penalty at all. No taxpayer action is required. AEP applies to 2025 tax year returns and later. This replaces the need to manually request FTA for eligible taxpayers.

Reasonable Cause

If you do not qualify for FTA or AEP, you may still request penalty abatement by demonstrating reasonable cause. The IRS considers circumstances such as serious illness, natural disaster, death of a family member, fire or casualty, inability to obtain records, and (in limited cases) reliance on incorrect professional advice. You will need documentation supporting your claim.

Arizona Extension Penalties

If you are an Arizona resident or earned income in Arizona, the Arizona Department of Revenue (ADOR) imposes its own penalties on top of federal penalties.

  • Extension underpayment penalty: If you file under an extension but paid less than 90% of the tax shown on your Arizona return by the original April 15 due date, ADOR charges 0.5% per month on the unpaid amount from the original due date until payment.
  • Late filing penalty: 4.5% of the tax due for each month (or fraction of a month) the return is late, up to a maximum of 25% (per A.R.S. Section 42-1125).
  • Late payment penalty: 0.5% of the tax due for each month (or fraction of a month) the payment is late, up to a maximum of 10%.

Arizona's interest rate on unpaid taxes matches the federal rate. To avoid the extension underpayment penalty, pay at least 90% of your Arizona tax liability by April 15 and file your return by the extended due date. If you meet these conditions and pay the remaining balance with the return, ADOR will typically waive the late payment penalty under its reasonable cause standard.

Practical Steps to Minimize Extension Penalties

Whether you are preparing for this year's extended deadline or planning ahead for next year, these steps can significantly reduce your penalty exposure:

  1. Pay what you can by April 15. Even a partial payment reduces the balance on which penalties accrue. Aim to cover at least 90% of your expected tax liability to stay within the safe harbor.
  2. Adjust your withholding. If you receive a W-2, work with your payroll administrator to update your Form W-4 so that your withholding matches your actual tax liability. Life changes (marriage, new dependents, a side business) all affect the right withholding amount.
  3. Make quarterly estimated payments. Business owners, freelancers, and investors with income that does not have tax withheld should make quarterly estimated payments using Form 1040-ES. The 2026 quarterly due dates are April 15, June 15, September 15, and January 15 of the following year.
  4. Review year-to-date financials regularly. If your income varies, checking your financials quarterly (or monthly) helps you estimate your tax liability before the filing deadline. This is especially important for business owners with capital gains, K-1 income from partnerships, or rental properties. Year-round tax planning makes April far less stressful.
  5. Request an installment agreement. If you cannot pay the full balance by the extended deadline, applying for an IRS installment agreement reduces the failure-to-pay penalty rate from 0.5% to 0.25% per month.
  6. Request penalty abatement. After paying, check whether you qualify for First Time Abatement or reasonable cause relief. Many taxpayers are eligible and do not realize it.

Frequently Asked Questions

Does filing an extension prevent penalties?

Filing an extension prevents the failure-to-file penalty (as long as you file by the extended October 15 deadline), but it does not prevent the failure-to-pay penalty or interest. Those charges begin on April 16 if any tax remains unpaid.

What is the penalty rate on unpaid taxes after an extension?

The federal failure-to-pay penalty is 0.5% of the unpaid balance per month, capped at 25%. Arizona adds its own extension underpayment penalty of 0.5% per month if less than 90% was paid by April 15. Interest also accrues on both the federal and state balances.

Can I get the penalty waived?

Yes, in many cases. If you have a clean compliance history for the prior three years, you may qualify for First Time Abatement. Starting with 2025 tax year returns, the new Automatic Exemption from Penalty (AEP) program may waive the penalty automatically. You can also request relief based on reasonable cause if unusual circumstances prevented timely payment.

What if I expect a refund?

If your withholding and estimated payments exceed your total tax liability, no penalty applies because there is no underpayment. You do not need to make additional estimated payments or pay anything with your extension. However, you should still file by the extended deadline to claim your refund, as refunds expire three years from the original due date.

Do I have to pay estimated taxes if I have a W-2?

If your W-2 withholding covers your full tax liability, you generally do not need to make estimated payments. However, if you have significant income from other sources (investments, rental properties, freelance work, or a business), your withholding alone may not be sufficient, and quarterly estimated payments can help you avoid the underpayment penalty.

How K&R Taxes Can Help

Penalties and interest add up quickly, and the rules for avoiding them require planning before the deadline passes. At K&R Taxes, we help Arizona individuals and business owners with tax planning and preparation that includes estimated payment calculations, withholding reviews, and extension payment strategies. If you have already received a penalty notice, our IRS representation and accounting advisory team can evaluate whether First Time Abatement, reasonable cause, or another relief option applies to your situation.

Whether you need help resolving a current penalty or want to make sure you are set up correctly for next year, contact us to schedule a consultation. You can also explore our full range of services to see how we support individuals and businesses throughout the year.