Made a mistake on your tax filing? You’re not alone.
We asked 8 CEOs, founders, and execs to recount the most astonishing tax return mistake they ever came across.
And we follow it up with some advice on how to keep that from happening to you!
1. Undisclosed foreign assets and income
“One particularly impactful mistake I encountered involved a taxpayer who failed to disclose their foreign assets and income, unaware of the reporting requirements. This omission led to severe penalties and legal repercussions, as the IRS imposes strict regulations on the disclosure of foreign financial accounts and income. The impact of this mistake was substantial, resulting in a prolonged and complex process of rectifying the error, highlighting the importance of understanding and complying with international tax laws.”
👉 Shoeboxed pro tip:
You should always consult with a tax professional if you possess foreign assets and income to ensure compliance with applicable tax laws because undisclosed foreign assets and income can have some serious legal implications.
In the meantime, here are a few general guidelines to follow in order to prevent undisclosed foreign assets and income on your tax return.
If you are a US person, including US citizens and US aliens, you must report the following:
1. Foreign bank accounts
A FBAR (Foreign Bank Account Reporting) must be filed if you have authority or financial interest over an account outside of the US if the total amount of your accounts exceeds $10,000 any time during the tax year.
2. Foreign income
Income earned from a country outside the US such as business, wages, investment, or rental income needs to be reported on your tax return.
3. Foreign real estate
Any property or real estate owned outside of the US should be reported.
4. Foreign investments
Any investments in foreign bonds, mutual funds, stocks need to be reported as well as any income generated from these investments.
5. Foreign business interests
If you have an interest in or own a foreign business, you need to report the business and any income earned.
6. Foreign trusts
If you have any control over a foreign trust or are a beneficiary of one, you should report it on your tax return.
7. Foreign gifts and inheritance
There are also reporting requirements on inheritance and large gifts.
8. Foreign tax credit
If you paid any tax to a foreign country on any income earned there, you may be eligible for the foreign tax credit.
2. Unclaimed research trip deductions
“Many people think a business trip would only be eligible for a tax credit if they met with other businessmen or investors during that travel. What we didn’t know is that the trips we made for research would also be eligible for tax refunds, as long as we proved that the trip was necessary for the business.
“For instance, if I often fly to Europe to research more about golden visas and how to properly process them, something that online research won’t cut, I could file them for a tax credit. That’s because these trips are necessary for our business.”
👉 Shoeboxed pro tip:
Expenses for business trips, even for research purposes, are eligible for tax deductions under the following terms:
1. Ordinary and necessary expenses
Business-related expenses for a trip intended for research purposes are deductible if the expenses are ordinary and necessary and if the research is essential to your business.
2. Primary purpose
If the primary purpose of the trip is for business, then expenses such as accommodations, meals, and transportation are deductible.
To claim tax deductions for research-related travel expenses, you must be able to provide detailed records as proof of expenses such as a log of business activities, invoices, and receipts when filing your taxes.
4. Specific research-related expenses
You can also claim expenses specifically related to your research during a business trip such as analysis, data collection, and materials.
Personal expenses during the business trip are not deductible.
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3. Incorrect social security number entry
“Making a mistake in writing or typing your Social Security number can be unfortunate. Some people, in their rush to beat the tax-filing deadline, make many mistakes. One of the most astonishing tax-return mistakes I’ve ever encountered is writing or typing the wrong Social Security number just because they are in a hurry. Since this number is the primary identification for personal taxes, the filing was rejected. The taxpayer then had to redo everything and pay late fees due to this mistake.”
👉 Shoeboxed pro tip:
Mistakes happen so don’t panic. Filing a tax return with an incorrect social security number can lead to the rejection of your return, processing delays, or complications with the IRS. Therefore, the first thing to do is to fix it as soon as possible. That’s the best way to try and avoid potential issues with the IRS.
If you’ve already filed your return, you will need to file Form 1040-X to amend your tax return and correct the mistake. If you’ve just e-filed your tax return, but haven’t received confirmation, wait until the return is processed. The IRS will notify you that there is an issue with the social security number and you can then follow their instructions. If you’ve received confirmation of your return, contact the IRS and explain what happened.
To avoid these types of mistakes, always double check personal information before submitting your tax return. Being proactive about fixing the mistake demonstrates to the IRS your willingness to be compliant and may help avoid potential fines or penalties.
4. Invalid pet dependent claim
“One unusual tax-return mistake that I’ve seen is someone claiming a pet as a dependent. In fact, I know many taxpayers have attempted to claim their pets as dependents on their tax returns, thinking they could receive tax deductions for pet-related expenses such as food, veterinary care, and even pet insurance. This is not a valid deduction, as the tax code only allows individuals to claim human dependents, such as children or certain relatives.”
👉 Shoeboxed pro tip:
Pets cannot be claimed as dependents on your federal tax return. Claiming dependents for tax purposes only applies to human individuals, such as qualifying relatives or children.
Service animals may qualify for tax deductions if they assist with an impairment or disability. Certain expenses associated with the maintenance and care of the service animal may be deducted.
The same goes for guard dogs. You may be able to deduct certain expenses as a business expense if the dog is used for security purposes for your business.
Likewise, certain expenses associated with the maintenance and care of animals used in a farming business may be deductible.
5. Unrecognized gaming-addiction treatment deduction
“A notable tax mistake I’ve encountered involved a taxpayer claiming a deduction for their child’s gaming-addiction treatment, believing it to be a medical expense. The IRS, however, does not recognize gaming addiction as a medical condition and therefore denied the deduction. This case is striking because it mirrors a common struggle among many families, showing a misunderstanding of what qualifies as deductible. If accepted, it could have meant a considerable tax refund and opened up a whole new avenue for claiming deductions related to behavioral-health issues. This incident is a stark reminder for taxpayers to thoroughly understand the tax code’s stipulations regarding deductions, as the IRS maintains strict definitions, especially concerning medical expenses.”
👉 Shoeboxed pro tip:
It’s important to stay up-to-date as to what qualifies as a deductible expense on your tax return. While medical expenses that exceed 7.5% of your AGI are covered, a gaming addiction does not qualify as a medical expense. Gaming addictions fall in the behavioral health category and do not qualify as a deductible.
For more information on deductions and how the IRS defines a medical expense, check the IRS website or consult a tax professional.
6. Incorrect filing status during separation
“One remarkable mistake I witnessed involved an individual who filed as a single taxpayer while still legally married but separated. This error led to complications in property division during divorce proceedings and created a financial mess that could have been avoided with the correct filing status. It highlighted the importance of understanding tax implications during significant life changes.”
👉 Shoeboxed pro tip:
Choosing the correct filing status is important especially during a separation or divorce because it can significantly impact your tax liability.
Here are some important tips to help avoid filing an incorrect status during a separation.
1. Know the different filing statuses
Familiarize yourself with all the filing statuses such as Married Filing Separately, Married Filing Jointly, Head of Household, and Single, along with the eligibility requirements for each status.
2. Legal marital status
Your legal marital status is determined by your marital status as of December 31 of the tax year. To be considered unmarried for tax purposes, you are legally separated by a court order or divorce decree by the end of the tax year.
3. Keep communication open
Keep the communication open with your spouse or ex-spouse regarding your tax situation and discuss the appropriate filing status for each of you.
4. Look into head of household
Instead of filing as married filing separately or single, consider the head of household status. If you have dependents, you may qualify for head of household which usually has a better tax rate than the other two filings.
5. Check state laws
State laws sometimes differ from federal laws. Some states have different guidelines regarding filing status so be sure to check with your state.
6. Consult a professional
Consult a legal professional, tax professional, or accountant who is knowledgeable about family law and state requirements of filing statuses during a separation.
7. Misreported cryptocurrency transactions
“The most astonishing tax-return mistake I’ve seen in the realm of crypto-taxation involved someone who mistakenly reported their cryptocurrency transactions as income, rather than capital gains. This error occurred because the individual didn’t realize that each trade between cryptocurrencies constituted a taxable event. Instead of reporting the capital gains and losses from each transaction, they reported the total value of the transactions as regular income, leading to a significantly higher tax liability. The impact was substantial, both in terms of the tax bill and the fines for the inaccurate reporting. It serves as a stark reminder of the complexity of crypto taxes and the importance of understanding the nuances of tax laws as they apply to cryptocurrency trading.”
👉 Shoeboxed pro tip:
Misreporting cryptocurrency transactions can lead to potential legal issues.
Here are some tips to ensure accurate reporting.
1. Detailed records
Keep detailed records of crypto transactions including dates, amounts, and involved parties. This documentation will help to ensure accurate reporting and is necessary in case of an audit.
2. Cryptocurrency accounting software
Specialized crypto accounting software can help to avoid misreporting crypto transactions. This software will automate the process, calculate gains and losses, and generate reports for tax purposes.
3. Understand crypto tax regulations
Familiarize yourself with crypto regulations and the tax implications. It’s important to understand how different transactions are taxed.
4. Report all crypto transactions
Be sure to report all transactions so that you don’t inadvertently leave out any taxable transactions. This includes selling, exchanging, and receiving crypto as income.
5. Determine gains and losses
Determine the gains and losses associated with each transaction. This will help to report it accurately on your tax return.
Remember, crypto trades are treated as capital gains and losses. The only time crypto is treated as income is if you received it in exchange for work performed.
8. Misclassification of proprietary software
“In my role as a tech CEO, I’ve seen some surprising tax blunders. One that had my jaw drop was when an employee, during tax filings, incorrectly classified our company’s proprietary software as off-the-shelf, retail software. Our software, a sophisticated product painstakingly developed by our skilled engineers, was just casually grouped with generic, store-bought software. This error seriously undervalued our intellectual property and led to a gross miscalculation in tax deductions for research and development. Figuring this out was like finding a needle in a haystack, then scrambling to rectify it. Truly, it was an unforgettable lesson in the importance of accurate classification in tax filings!”
👉 Shoeboxed pro tip:
There are several tips for avoiding misclassification of proprietary software.
Consider the following:
1. Purpose of software
Is the software for sale to customers or for internal use? Different uses have different legal and tax implications.
Document the purpose, use, and development process of the software for potential legal disputes or audits.
3. Legal professionals
Consult legal professionals who specialize in tax law and intellectual property. They can guide you through the classification process and the tax implications.
4. Type of intellectual property protection
Is the software protected by copyright or protected by a patent? These two protections may have different tax implications so be sure to consider the different types of intellectual property protection associated with the software.
5. Draft and review contractual agreements
6. Identify the various streams of revenue
Does the software generate revenue from sales, subscription fees, or licensing fees? The different streams may have different tax implications.
7. Understand the allocation of costs
It’s essential to properly allocate the costs associated with software development. For tax purposes, some costs are considered current expenses and some capital expenditures.
8. Keep detailed records
Keep records of all financial transactions and agreements including expenses incurred during development, licensing agreements, and sales.
9. Consult a tax professional
Consult tax professionals who have experience in the software industry. They can advise you of the different tax implications of the different classifications.
10. Review periodically
It’s important to periodically review the classification of your proprietary software to look for changes in revenue model, distribution, or its use. Agreements and documentation should be updated as well.
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As you can see, there’s a lot involved in filing your taxes. There are so many tax guidelines and these can change from year to year or vary in different states. Some of the most common mistakes when filing taxes include issues with reporting requirements, human error, misclassifying, misreporting, or missing out on deductions.
Unfortunately, most of these oversights lead to steep penalties, fines, and even legal repercussions. That’s why it’s so important to consult a legal or tax professional who can offer specific advice tailored to your situation if you ever have any questions when filing your return.
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