Tax season can be stressful, even when everything goes perfectly. As a CPA firm with decades of experience, we have seen individuals make many mistakes, resulting in costly errors and delays. Whether you’re preparing your tax return on your own or hiring an experienced CPA firm, the best advice we can give is to ensure accuracy before filing and avoid these common tax season mistakes.
Mistake #1: Not filing electronically
The IRS has already warned taxpayers of potential delays in the 2022 tax season. With an already backlogged system from 2020, labor shortages, and additional programs needing special attention, the 2022 tax season may not be smooth sailing. The IRS recommends taxpayers file electronically to avoid any unnecessary delays associated with mailing physical documents.
When filing electronically, you will receive an automated notification that the IRS has received your return. When filing by mail, taxpayers do not receive notice of receipt, leaving you wondering if your documents have arrived safely and in a timely manner. Taxpayers who mail in their returns are also exposing themselves to potential data theft, as well as data entry errors as the IRS must enter their information into the system.
What if you owe the IRS? You can still file electronically, requesting that the IRS withdraw the money. Taxpayers can also decide when they would like the payment to be withdrawn, up to the filing deadline.
Mistake #2: Improperly accounting for advance child tax credits
If you received advanced monthly child tax credit payments in 2021, you will need to reconcile these payment amounts on your tax return. The IRS mailed 6419, 2021 advance CTC letters to help taxpayers reconcile their payment amounts on their returns. In rare cases, the information provided on the CTC letters is incorrect so it is vital to ensure that the payment amount matches what you have actually received. Failure to reconcile your advanced monthly payments on your tax return could result in a delay or missing out on the complete child tax credit. You’ll also want to ensure that your notice from the IRS matches the amount you actually received.
Mistake #3: Entering incorrect information
Too often we see taxpayers who have filed their tax return on their own make simple errors or typos. These can lead to delays, possible penalties, and missed opportunities. It is crucial to double-check all information to ensure accuracy before filing. Areas where we most frequently see this mistake including individuals who are filing self-employment documents and businesses that file 1099s. These mistakes can easily be avoided by double-checking every entry, understanding what boxes to check, and what credits and deductions truly apply to you. When in doubt, consult with an experienced CPA for assistance in filing taxes and other related documents. While you do have the option to amend your return after filing, this has been an area of extreme frustration for many taxpayers over the past couple of years as the IRS backlog continues to mount. When possible, it’s ideal to get your return right the first time.
Mistake #4: Not declaring crypto earnings
Cryptocurrency really took off in 2021, with more people owning and selling cryptocurrency than ever before. Because of the increase in popularity, IRS process and rules about how cryptocurrency is being taxed are evolving. Currently, the IRS considers crypto to be property and taxes it as such. In most cases, cryptocurrency becomes taxable once it has been sold or exchanged, or when earning interest through an interest-bearing crypto savings account. It is important to be transparent with crypto earnings, gains, and other actions when filing taxes to ensure adherence to the tax laws. If you’re unsure of how your cryptocurrency affects your taxes, consult with a CPA.
Mistake #5: Failing to pay taxes on gig work
Many gig workers, especially those new to the industry, fail to account for their gig income on their taxes. Gig work, such as driving for Uber and Lyft or delivering food through DoorDash, is all taxable income. The good news is that expenses related to your side hustle are deductible, which can help to reduce your taxable income. Make sure to keep track of all expenses through a cloud-based expense tracking app or other organized systems. If you’re using your personal vehicle to earn money, keep a detailed log of your mileage.
Note that the IRS will have increased oversight of gig income in 2022 as the platforms and marketplaces many people use to earn extra income will face a much lower threshold for reporting payments. Form 1099-K must be filed for all users who earn more than $600 on a given platform.
With the already expected IRS delays for tax season 2021, it is vital to ensure your tax return is accurate and all income is accounted for before filing. Taxpayers who file with errors could experience lengthy delays, or the need to file an amended return. If you have questions or would like to hand off your tax return to avoid tax season mistakes, send us a message. Our experienced CPAs can work with you to ensure your taxes are filed accurately and on time.