Even the most diligent business owners and detail-oriented individuals can make mistakes. Unfortunately, when it comes to your tax return, these mistakes can result in costly fines and IRS penalties. Here, we’ll review some of the most common errors that are made when preparing your tax return and filing taxes.
13 Tax Mistakes to Avoid
Taxes can be tricky, and millions of people make mistakes each year. Here are some of the most common tax mistakes we see and how you can avoid them to stay on the IRS’s good side.
1. Missing Legitimate Deductions
One of the most common mistakes people make is not taking advantage of all the deductions they qualify for. Whether it’s business expenses like mileage, home office use, or professional development costs, these can significantly reduce your tax liability. Unfortunately, they’re also often overlooked, especially if you’re not keeping records throughout the year. The key is to document your expenses as they happen and work with a tax professional who knows what to look for.
2. Filing Too Early (or Too Late)
The time that you file your return also matters. Although there are benefits to filing early, it’s vital that you wait until you receive all of your documents before doing so. Otherwise, you could miss out on certain tax credits and deductions. If you’re not sure about when to file or what documents you need, use tax software or partner with a tax expert.
3. Poor Record Keeping
If you’re scrambling to find receipts in a shoebox or digging through months of bank statements right before the filing deadline, it’s going to cause some stress. Inconsistent or disorganized record-keeping can lead to missed write-offs or even an IRS audit. To avoid this, set up a simple system to track income and expenses monthly. There are plenty of tools online to help you keep track of things electronically, or you can use a simple spreadsheet. Find something that works for you, but don’t forget to back up your files digitally if you’re using a cloud-based platform.
4. Submitting Inaccurate Information
Although it might seem like the easiest part of filing your taxes, one of the biggest mistakes that people make is putting inaccurate information on their tax forms. Always double-check the spelling of your name, your Social Security number, address, and even your filing status. If you file your taxes with the wrong information, it can result in several issues with the Internal Revenue Service (IRS).
5. Misclassifying Workers
The IRS takes worker classification seriously, and getting it wrong can result in hefty penalties. If you’re treating an employee like a contractor (or vice versa), you could be liable for unpaid payroll taxes, benefits, and more. Make sure you understand the state and federal tax laws around employee vs. independent contractor status, and revisit your team structure regularly.
6. Math Mistakes
Every year, the IRS reports millions of math errors on tax returns that range from simple addition mistakes to using the wrong numbers from a tax table. These mistakes are often caught using specific software, and entering the wrong numbers could make you liable for different refunds or more money owed. If mistakes are found, the IRS will generally send you a letter and explain. This allows you to fix the mistake, but it will delay the processing of your return.
7. Overlooking Estimated Quarterly Taxes
If you’re self-employed or own a small business, you’re usually required to pay estimated taxes throughout the year. Many people make the mistake of skipping these quarterly payments, only to be hit with a large tax bill and penalties when April rolls around. A good rule of thumb is to set aside a portion of your income each month and make your estimated tax payments on time. Your accountant can help you calculate the right amount, but it’s usually based on your reported income from the most recent filing year.
8. Ignoring Retirement Tax Strategies
Many taxpayers miss out on valuable deductions and tax-deferred growth by not contributing to retirement accounts like a SEP IRA, SIMPLE IRA, or 401(k). These tools are especially useful for small business owners or freelancers. However, knowing where to start and how much to contribute can be confusing. Working with a financial planner or a tax advisor can help you determine the best kind of retirement plan for your situation.
9. Bad Entity Selection
Your legal business structure (i.e., sole proprietorship, LLC, S Corp, or C Corp) has a direct impact on how you’re taxed. Choosing the wrong one can cause problems, such as unnecessary taxes or even missed savings. As your income grows or your operations change, it’s smart to review your business structure annually to make sure it’s still working in your favor.
10. Not Knowing Depreciation Rules
Depreciation allows you to recover the cost of big purchases like equipment, vehicles, or even certain types of property over time. However, it can be a bit confusing and easy to misunderstand. Still, thanks to tax changes in recent years, there are now more opportunities for bonus depreciation and Section 179 deductions, which can boost your tax savings. Working with a professional who understands these rules can help you lower your overall income tax or maximize your tax refund.
11. Mixing Personal & Business Expenses
Mixing personal and business expenses is a very easy way to gain the attention of the IRS. It also makes tax prep a lot harder than it needs to be. The best way to keep things separate is to use different bank accounts and credit cards for your business, and keep good records. When reimbursements are required, always document them clearly and consistently.
12. Failing to Plan for Sales Tax
With more businesses selling online and across state lines, sales tax compliance is more complex than ever. Some businesses overlook their obligation to collect and remit sales tax, especially if they assume it doesn’t apply to digital products or services. But sales tax laws vary widely by state and can change frequently. If you’re unsure whether you have to deal with separate sales tax laws in a particular state, it’s important to be proactive and take the necessary actions.
13. Skipping Year Round Tax Planning
Tax planning isn’t just for April. It’s something that should happen all year long. Waiting until the last minute limits your options and increases your risk of errors or missed opportunities. Plus, it can cause many people a lot of (avoidable) stress. Instead, work with a tax professional and schedule quarterly check-ins to ensure that you stay organized and keep up with all of the requirements.
By avoiding these common tax mistakes and staying proactive throughout the year, you can protect your finances, reduce your risk of penalties, and make smarter decisions for your business or household. To help, Del Real Tax is here. Our Chicago accounting firm specializes in working with small businesses, self-employed professionals, and families to simplify the process and maximize your savings. Schedule a free consultation today and let our team help you avoid mistakes before they cost you.
