1. Math Errors and Miscalculations

This sounds like something only paper filers deal with. It’s not. Software handles arithmetic, sure, but it doesn’t catch you entering $52,000 when your W-2 says $25,000. Transposed digits are the most common version of this, and the IRS catches them fast because every W-2 and 1099 gets matched to your return electronically.

The IRS says the error rate on paper returns runs around 21%. E-filed returns come in under 1%. But even e-filers make input mistakes — and those mistakes trigger CP2000 notices, which propose additional tax plus interest from the original due date. If the understatement exceeds 10% of your correct tax (or $5,000, whichever is greater), you’re looking at a 20% accuracy-related penalty on top of the tax owed.

2. Wrong Filing Status

Filing status isn’t a preference — it’s determined by your marital status and living situation on December 31. But people get it wrong constantly. The most expensive mistake here is filing Single when you qualify for Head of Household. That status gives you a larger standard deduction ($22,500 vs. $15,000 for 2025) and wider tax brackets. Filing the wrong way means you overpay, and the IRS won’t fix it for you.

Going the other direction is worse. Claiming Head of Household when you don’t qualify — say you’re still married and your spouse didn’t live apart for the last six months of the year — is an audit flag. The IRS added specific due-diligence requirements for paid preparers on HOH claims back in 2016, and they haven’t stopped scrutinizing self-prepared ones either. If it’s wrong, you owe the extra tax plus accuracy penalties.

3. Missing or Incorrect Social Security Numbers and Transposed Bank Digits

A wrong SSN on your return — yours, your spouse’s, or a dependent’s — will get your return rejected if you e-file, or significantly delayed if you paper-file. One wrong digit on a dependent’s SSN and the child tax credit ($2,000 per child) gets denied.

Transposed routing or account numbers on direct deposit are a different kind of pain. Your refund goes to the wrong bank account. If that account exists and belongs to someone else, recovering the money involves the bank, the IRS, and a lot of time. If the account doesn’t exist, the deposit bounces back to the IRS and they mail you a paper check — adding 6 to 8 weeks to your refund timeline. Double-check those numbers. Then check them again.

4. Missing 1099s and W-2s

Every Form 1099 and W-2 that gets sent to you also gets sent to the IRS. Their Automated Underreporter program (AUR) matches every document against your return. If something doesn’t match, you’ll get a CP2000 notice, usually 12 to 18 months after filing. By then, interest has been accruing since April 15 of the year the return was due.

People forget about that bank account that earned $47 in interest. They overlook the 1099-DIV from a brokerage that sold a small position. They don’t realize that cancellation of debt (1099-C) counts as income. None of this is optional. Report all of it, even if the institution was late sending the form. File after you have everything. If something shows up after you’ve filed, amend the return — don’t wait for the IRS to find it, because by then you’re paying interest on the balance.

5. Cost Basis Mistakes — Especially Crypto and Brokerage Accounts

This is where self-prepared returns go off the rails the most. Your brokerage sends a 1099-B with proceeds. If cost basis isn’t reported to the IRS (common with older shares, crypto, or certain transfers), the IRS sees the full sale price as potential gain. You need to report the correct basis yourself on Form 8949, or you’re paying tax on money you never made.

Crypto is a mess. Most exchanges provide transaction history, but basis tracking across wallets, swaps, and DeFi protocols is on you. The IRS doesn’t have clean data from decentralized platforms, but they do have subpoenas out to the major exchanges. If you sold $40,000 in Bitcoin and your cost basis was $38,000, you owe tax on $2,000 in gain. Report zero basis and you owe tax on $40,000. That’s a big difference. For a full breakdown, see our cryptocurrency tax reporting guide.

ESPP and RSU holders have their own version of this problem. When your employer gives you restricted stock or lets you buy shares at a discount, the bargain element gets reported as W-2 income. Your brokerage’s 1099-B doesn’t always reflect that adjusted basis. If you report the gain without accounting for the income already taxed through payroll, you’re double-counting — and overpaying. We fix this on client returns every single year.

6. Missed Required Minimum Distributions (RMDs)

If you’re 73 or older (the age went up under SECURE 2.0) and you have a traditional IRA, SEP IRA, SIMPLE IRA, or employer plan, you need to take your RMD by December 31 each year. Miss it and you owe a 25% excise tax on the amount you should have withdrawn. That penalty drops to 10% if you correct the shortfall within two years — but that’s still a steep price for forgetting.

The calculation itself trips people up. Each account has its own RMD based on the prior year-end balance divided by an IRS life expectancy factor. People with multiple IRAs can aggregate and take from one account, but 401(k)s don’t allow that — each plan’s RMD has to come from that plan. Miss one account, and you’ve got a penalty even if you over-withdrew from another.

7. Double-Counted State Tax Refunds

If you received a state tax refund last year and you itemized deductions the year before, some or all of that refund is taxable income on your federal return this year. The IRS knows about it because the state sends Form 1099-G.

Where people mess this up: they report the full refund as income even when they took the standard deduction the prior year (in which case it’s not taxable at all). Or they fail to report it entirely when they did itemize, which triggers an AUR notice. The correct answer depends on whether you got a tax benefit from the state tax deduction. If the SALT cap limited your deduction to $10,000 and your state taxes exceeded that, only a portion of the refund may be taxable. This calculation requires looking at the prior year’s return, which tax software doesn’t always prompt you to do.

8. Wrong Dependent Claims and Tiebreaker Rules

Two people can’t claim the same dependent. When they try, both returns get flagged and at least one gets rejected or audited. The IRS has tiebreaker rules for this: the custodial parent wins, then the parent with the higher AGI, then the taxpayer with the higher AGI if neither is a parent.

Divorced and separated parents trip over this constantly. The custodial parent has the default right to claim the child, but can release it to the noncustodial parent using Form 8332. Without that form, the noncustodial parent’s claim will be denied. And if you claim a child who lived with someone else for more than half the year, expect a letter. The child tax credit, earned income credit, and head of household status all ride on this — so a wrong dependent claim can cost thousands.

9. Earned Income Tax Credit (EITC) Errors

The EITC has one of the highest error rates of any credit on the return — the IRS estimates improper payments between 21% and 26% of total EITC claims. That’s billions of dollars. Errors include claiming qualifying children who don’t meet the residency test, misreporting income, and filing with the wrong status.

If you claim the EITC incorrectly and the IRS determines it was due to reckless or intentional disregard of the rules, you’re banned from claiming it for two years. If the IRS determines fraud, the ban extends to ten years. The credit itself can be worth up to $7,830 for a family with three or more qualifying children, so losing it for multiple years adds up fast. We’ve covered this in detail — if the EITC applies to you, read through how credits interact with your bracket before filing.

10. Missing Schedule B for Interest and Dividends Over $1,500

If your total ordinary dividends or taxable interest exceeds $1,500 for the year, you’re required to file Schedule B. Most tax software generates it automatically, but some filers skip it or don’t realize it’s needed. The schedule also asks whether you have a financial interest in or signature authority over a foreign financial account — and answering “yes” triggers additional reporting requirements (see #12 below).

Leaving Schedule B off your return doesn’t change your tax liability directly, but it’s an incomplete return. The IRS can hold processing, and if the foreign-account question goes unanswered, you’ve missed a disclosure that carries its own penalties.

11. Missing Form 8606 for Nondeductible IRA Contributions

If you make contributions to a traditional IRA that you can’t deduct — because your income is too high and you’re covered by a workplace plan — you need to file Form 8606. Every year you contribute. This form tracks your basis in nondeductible contributions so that when you eventually withdraw the money (or convert to Roth), you don’t pay tax on money that was already taxed.

Skip this form and you lose the paper trail. Years later, when you take distributions, the IRS treats the entire amount as taxable because there’s no record of your after-tax contributions. The penalty for failing to file Form 8606 is $50 per occurrence, which sounds minor — but the real cost is paying income tax on money you already paid tax on. For someone who made $7,000 in nondeductible contributions annually for ten years, that’s $70,000 in basis that disappears without documentation.

12. Foreign-Asset Reporting Gaps (Form 8938 and FBAR)

Two separate reporting requirements apply to foreign financial accounts, and they come from two different agencies. The FBAR (FinCEN Form 114) is filed with the Financial Crimes Enforcement Network if your aggregate foreign account balances exceed $10,000 at any point during the year. Form 8938 is filed with the IRS if your foreign financial assets exceed $50,000 on the last day of the year (or $75,000 at any point) for domestic filers — higher thresholds apply if you’re filing from abroad.

The penalties are severe. Willful failure to file an FBAR can result in a penalty up to $100,000 or 50% of the account balance, whichever is greater. Even non-willful violations carry penalties up to $10,000 per account per year. Form 8938 non-filing carries a $10,000 penalty per form, plus an additional $10,000 for each 30-day period of non-filing after IRS notice, up to $50,000. These are not proportional to the tax owed — they’re proportional to the account size. A $200,000 account you forgot to report can generate penalties that exceed the balance.

13. State-Residency Mistakes for Movers

If you moved from one state to another during the tax year, you probably owe part-year returns to both states. A lot of people file a full-year return in just their new state and ignore the old one. That works until the old state’s department of revenue notices you had income sourced there and sends you a bill with penalties and interest.

New York is especially aggressive about this. If you leave New York and maintain a home there, you can be treated as a statutory resident for the full year — which means full-year New York tax on all your income, not just the portion earned while living there. The 548-day rule for domicile changes has specific requirements, and auditors check cell phone records, veterinarian visits, and Amazon delivery addresses. If you moved recently, our New York state tax planning guide covers what you need to know.

14. Missed Estimated Tax Payment Tracking

Self-employed filers and people with investment income are supposed to pay taxes quarterly through estimated payments (Form 1040-ES). But the mistake isn’t just missing the payments — it’s failing to track them correctly on the return. If you made four estimated payments of $3,000 each and only report three on your 1040, you’ll get a notice saying you owe $3,000 plus penalties, even though you already paid it.

The underpayment penalty for 2025 runs at roughly 7% annualized, compounded daily. Miss all four quarters and you could owe several hundred dollars in penalties on a $12,000 annual tax obligation. Safe harbor rules help: if you pay at least 100% of last year’s tax liability (110% if AGI exceeds $150,000), you avoid penalties regardless of what you owe. Our guide on estimated tax payments for freelancers breaks this down step by step.

15. AMT Surprises

The Alternative Minimum Tax still catches people off guard, even though the 2017 tax law raised the exemption significantly. Two situations trigger it most frequently: exercising incentive stock options (ISOs) and having large state and local tax deductions.

When you exercise ISOs, the difference between the exercise price and the fair market value on the exercise date is an AMT adjustment — it’s not regular income, but it is AMT income. Someone who exercises $200,000 worth of ISOs in a single year can face an AMT bill of $50,000 or more, with no cash from the transaction to pay it (because they didn’t sell the shares). For high earners in states like New York and California, the SALT cap actually reduces AMT exposure because you’re already limited to $10,000 in state tax deductions for regular tax purposes. But if you’re in a situation where AMT applies, tax software alone won’t explain why — and it definitely won’t tell you whether to spread your ISO exercises across multiple years.

16. Roth Conversion Reporting Errors

Converting a traditional IRA to a Roth IRA is taxable. The amount converted shows up as income on your return, and it gets reported on Form 8606 Part II. The most common error: people convert, see the 1099-R with distribution code 2 or 7, and either report it as a non-taxable rollover or double-report it alongside Form 8606.

If you had nondeductible contributions in any of your traditional IRAs, the pro-rata rule applies. You can’t just convert the after-tax portion and leave the pre-tax money behind. The IRS calculates the taxable portion based on the ratio of pre-tax to after-tax money across all your traditional, SEP, and SIMPLE IRAs combined. Getting this wrong means you either overpay or underpay tax on the conversion — and an underpayment triggers interest plus a potential accuracy penalty. This is Form 8606’s most complicated section, and it’s one of the main reasons people end up in our office after trying to self-file a conversion year.

17. Gambling-Loss Deduction Misuse

You can deduct gambling losses — but only up to the amount of your gambling winnings, and only if you itemize. A surprising number of people deduct losses that exceed their winnings, or claim gambling losses while taking the standard deduction. Both are wrong.

If you won $8,000 at a casino and lost $12,000 over the course of the year, your deduction caps at $8,000. The other $4,000 in losses disappears — you can’t carry it forward, can’t use it to offset other income, and can’t bank it for next year. Report the full $8,000 in winnings on your return and claim up to $8,000 in losses on Schedule A. The IRS requires contemporaneous records: date, location, type of wager, amounts won and lost. If you’re audited and your records consist of “I think I lost about $12,000,” the deduction gets denied in full.

18. Hobby vs. Business Misclassification

Section 183 of the tax code draws the line between a hobby and a business. If the IRS reclassifies your business as a hobby, you lose the ability to deduct expenses against the income. All the revenue stays taxable, but the expenses vanish. That can turn a break-even or small-loss activity into a five-figure tax bill.

The IRS looks at whether you’ve shown a profit in three of the last five years (two of seven for horse-related activities), whether you keep books and records, whether you depend on the income, and whether you conduct the activity in a businesslike manner. The worst-case scenario: someone reports Schedule C losses for years, the IRS audits, reclassifies the activity as a hobby, and assesses tax on the income with no offsetting deductions plus accuracy penalties. We’ve written a full breakdown of the hobby loss rule if this applies to your situation.

19. Side-Gig 1099-NEC vs. 1099-MISC Confusion

Since 2020, nonemployee compensation goes on Form 1099-NEC, not 1099-MISC. But confusion persists. Some payers still issue the wrong form. Some filers report 1099-NEC income on the wrong line of their return, or miss it entirely because they’re looking for a 1099-MISC that never comes.

1099-NEC income goes on Schedule C and is subject to self-employment tax (15.3% on the first $168,600 of net earnings for 2025, plus 2.9% Medicare above that). 1099-MISC income — things like rent, royalties, or prizes — has different reporting rules depending on the box it appears in. Mixing them up either understates your self-employment tax or overstates it. Neither is good. We break down the differences in detail in our 1099-NEC vs. 1099-MISC guide, and our self-employment tax explainer covers the math.

20. Audit-Bait Items

Some deductions aren’t wrong — they’re just disproportionately scrutinized. If you claim them, you’d better have documentation that would survive an examiner’s review.

Oversized home office deduction: The IRS knows the average home office. If yours is 40% of your home’s square footage and your Schedule C income is $50,000, expect questions. The space must be used regularly and exclusively for business. “Exclusively” means no kids doing homework at the desk. See our Form 8829 guide for the rules.

100% business use of a vehicle: Unless you have a dedicated work vehicle that never makes a personal trip, claiming 100% business use is a red flag. The IRS expects some personal use. A 90% business-use claim with a mileage log is far more defensible than a 100% claim with no records.

Chronic Schedule C losses: Reporting losses year after year while maintaining a lifestyle that doesn’t match those losses invites the hobby-loss argument. If your side business has lost money for five consecutive years, the IRS will ask why you’re still calling it a business. Have a written business plan, marketing records, and evidence that you’re actively trying to turn a profit.

None of these deductions are illegal. But claiming them without ironclad records is how audits start. Our IRS audit guide covers what the process looks like if you do get the letter.

21. Missed Filing Deadlines and Extension Misunderstandings

An extension to file is not an extension to pay. This is the single most misunderstood sentence in tax law. Filing Form 4868 gives you until October 15 to submit your return. It does not give you until October 15 to pay what you owe. Tax is due April 15 regardless of whether you file an extension.

Fail to file by April 15 without an extension and the failure-to-file penalty kicks in at 5% of the unpaid tax per month, up to 25%. The failure-to-pay penalty is 0.5% per month, also capped at 25%. Both run simultaneously. If you owe $10,000 and miss the deadline entirely — no extension, no payment — you’re looking at $500/month in failure-to-file penalties plus $50/month in failure-to-pay penalties, plus interest. File the extension even if you can’t pay. The extension eliminates the larger penalty. Then pay as much as you can and set up a payment plan for the rest. For more on late filing, see our back taxes guide.

22. IRS Letter Mishandling

This isn’t a return preparation error — it’s a post-filing error that turns a small problem into a big one. The IRS sends a notice. You ignore it. They send another. You ignore that too. Eventually they assess the tax, add penalties, and start collection proceedings. By the time you respond, the window to dispute the adjustment without going to Tax Court has closed.

CP2000 notices (proposed changes to your return) have a 30-day response window. If you agree, you sign and pay. If you disagree, you respond with documentation. Ignoring it means the IRS assumes you agree and assesses the full amount. CP14 notices (balance due) start the clock on collection. If you don’t respond or set up a payment plan, the IRS can file a federal tax lien, levy your bank accounts, or garnish your wages. Every notice has a deadline. Read them. Respond on time. If you don’t understand the notice, get help before the deadline passes.

Sources & References

• IRS Revenue Procedure 2024-40 — Tax Year 2025 Inflation Adjustments
• IRS — Child Tax Credit
• IRS — Earned Income Tax Credit (EITC)
• IRS — Required Minimum Distributions (RMDs)
• IRS — Understanding Your CP2000 Notice
• IRS — Self-Employment Tax (Social Security and Medicare)
• IRS — Failure to File Penalty
• IRS — Failure to Pay Penalty
• 26 U.S.C. § 183 — Activities Not Engaged in for Profit
• 26 U.S.C. § 6662 — Imposition of Accuracy-Related Penalty
• 26 U.S.C. § 4974 — Excise Tax on Certain Accumulations in IRAs
• 26 U.S.C. § 6654 — Failure by Individual to Pay Estimated Income Tax
• FinCEN — Report of Foreign Bank and Financial Accounts (FBAR)
• New York State DTF — Nonresidents and Part-Year Residents