10 Common End-of-Year Tax Mistakes to Avoid

It’s the end of another year. While this is a time when many people do some last-minute tax planning, it is also a time when many people make all-too-common tax mistakes. The Internal Revenue Service (IRS) is intimately familiar with these mistakes—and it looks for them when examining taxpayers’ returns to decide whether to open an audit or engage Special Agents from IRS Criminal Investigation (IRS CI). Here is a brief look at 10 common end-of-year tax mistakes that are on the IRS’s radar from Texas tax fraud lawyer Lawrence Brown.

Mistake #1: Filing Too Early

One of the first mistakes the IRS warns against is filing too early. As the IRS explains, to avoid under-reporting taxable income, taxpayers “should wait to file until they’re certain they’ve received all their tax reporting documents.” For high-income and high-wealth taxpayers, this includes not only W-2s and 1099s for ordinary income but 1099-Bs for investment income and other necessary forms from third parties as well.

Mistake #2: Ignoring Discrepancies

High-income and high-wealth taxpayers cannot afford to ignore discrepancies between their own financial records and the information they receive from their employers, brokers, banks and other third parties. For example, if a taxpayer receives a 1099 that is inconsistent with their deposit records, this is an issue that the taxpayer must reconcile before filing a federal return with the IRS. High-income and high-wealth taxpayer compliance and small business tax compliance are both current IRS enforcement priorities, so inconsistencies here present a high risk of triggering an IRS audit.

Mistake #3: Ignoring the Technicalities

While technical errors on a taxpayer’s returns might not warrant the imposition of monetary penalties themselves, these types of errors will often lead to additional scrutiny from the IRS. The IRS specifically warns against common mistakes such as:

• Omitting or providing an inaccurate social security number (SSN)
• Misspelling a taxpayer’s or dependent’s name
• Choosing an incorrect filing status
• Failing to include all required signatures
• Inaccurately reporting information from W-2s, 1099s or other third-party tax forms

The more mistakes a taxpayer makes on a return, the more likely the IRS is to take notice. With the IRS increasingly relying on its technological resources—including artificial intelligence (AI)—to examine taxpayers’ returns, revenue agents are both better able to identify these types of issues and better equipped with the time and resources they need to conduct in-depth examinations and audits.

Mistake #4: Math Errors

According to the IRS, “[m]ath errors are some of the most common mistakes” on both individual and corporate federal income tax returns. This includes math errors involving basic income tax calculations as well as math errors involving credits and itemized deductions. Here too, the more mistakes a taxpayer makes, the more likely the taxpayer is to face scrutiny from the IRS (as opposed to a simple request for a correction). Significant math errors are more likely to trigger invasive IRS scrutiny as well.

Mistake #5: Improperly Claiming “Business Expense” Deductions

While businesses can claim deductions for an extremely wide range of expenses, in order to be deductible, an expense must be “ordinary and necessary” for the business’s operation. As the IRS explains:

“An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”

While an expense does not have to be “indispensable,” it cannot be completely irrelevant to the business’s operations. Thus, personal expenses—including travel, lodging and luxuries—that have no direct relationship to a business’s operations (or that appear to have no direct relationship to a business’s operations) are clear red flags for the IRS.

Mistake #6: Overlooking Delinquent Filings

The longer a filing remains past due, the more penalties the delinquent taxpayer will incur (at least until the taxpayer reaches the maximum penalty amount for the delinquency at issue). Thus, overlooking delinquent filings at the end of the year can increase taxpayers’ liability to the IRS significantly.

One of the most common delinquencies we see among high-income and high-wealth taxpayers is the delinquency of offshore account disclosures. While taxpayers receive an automatic extension to October 15 to file a Report of Foreign and Bank and Financial Accounts (FBAR), going past October 15 can trigger substantial penalties. Additionally, while taxpayers can request an extension for IRS Form 8938, domestic taxpayers do not receive an extension for this offshore asset disclosure form automatically.

Mistake #7: Failing to Document Transactions

From business expenses to gambling winnings and cryptocurrency sales, taxpayers must accurately document all transactions for federal income tax compliance purposes. Failing to adequately document any end-of-year transactions can not only prevent taxpayers from reporting their income accurately, but it can also prevent them from successfully defending against an audit or investigation.

Mistake #8: Choosing an Unscrupulous Tax Preparer or Advisor

The IRS also warns about the risks of engaging an unscrupulous tax preparer or advisor. When seeking to minimize your federal tax liability in the upcoming year, it is critical to ensure that you are relying on the advice of a qualified professional who has your best interests in mind.

Mistake #9: Crossing the Line Between Tax Avoidance and Tax Evasion

In this same vein, taxpayers—and high-income and high-wealth taxpayers in particular—need to be careful to avoid crossing the line between lawful tax avoidance and unlawful tax evasion. While there are several strategies for legally minimizing the amount that taxpayers owe, going too far can expose taxpayers to civil or criminal liability for using an abusive tax shelter.

Mistake #10: Ignoring Known Filing or Payment Violations

Finally, just as taxpayers need to avoid overlooking delinquent tax filings, they also need to avoid ignoring other filing or payment violations—in particular, those that have been committed knowingly or willfully. While taxpayers have options for proactively resolving tax controversies with the IRS, many of these options go away once the IRS opens an inquiry.

Request an Appointment with Texas Tax Fraud Lawyer Lawrence Brown

If you have questions or concerns about federal tax compliance heading into 2025, we encourage you to get in touch. To request an appointment with Texas tax fraud lawyer Lawrence Brown, please call 888-870-0025 or contact us confidentially online today.