Filing Taxes with Software? Avoid These Common Pitfalls

As tax season approaches, more Americans are turning to software like TurboTax and H&R Block to tackle their tax returns. The ease and convenience of guiding yourself through questions to determine deductions and credits is undeniable. But while DIY online programs streamline much of the filing process, they also open the door for user error.

Even inadvertent mistakes can lead to less tax refund money, penalties, or full-blown audits down the line. In 2021 alone, the IRS sent out 9.2 million notices flagging issues with tax returns. Don’t let yourself get caught in the crosshairs. Filing Taxes with software? Avoid these common pitfalls:

Entering Incorrect Social Security Numbers

Double, then triple check that every social security number you enter for yourself, your spouse, and dependents is accurate. A mismatch between a name and identification number is one of the fastest ways to trigger an IRS inquiry. Sometimes there can be an honest typo like entering an 8 instead of a 3. Other times, separated couples continue claiming children as dependents without realizing only one parent legally can.

Regardless of how the error happens, rectify it sooner than later. An IRS notice will require verifying each SSN, which slows down any refund you have coming your way.

Forgetting About All Sources of Income

Most users of tax software intuitively plug in their W-2 forms detailing wages earned from an employer. But there’s more to total taxable income than just your full-time job. If you freelance, invest money, collect rental property revenue, receive alimony payments, sell things online, work part-time, or pick up miscellaneous side hustles, those earnings also get reported.

It’s not the IRS’s responsibility to track down your side pot of money. Leaving any taxable income off your return—even if unintentional—can warrant penalties for underpayment plus back taxes on unreported funds.

Taking the Standard Deduction When Itemizing Would Save More

The decision between recording specific deductible expenses or taking the standard deduction seems straightforward. Tax software defaults to the higher of itemized deductions or the standard option based on your filing status. However, taking the standard deduction just because it seems simpler could sell yourself short on substantial tax savings.

For people who own homes, have high medical bills, donate a lot to charity, or incur major work expenses, tallying up itemized write-offs yields far more tax relief. But collecting documentation on everything deductible and inputting those line items correctly into software requires diligence many filers don’t exert. Do your homework to deduce whether itemizing this year makes financial sense over the standard allowance.

Not Noting Life Changes That Impact Filing

Tax software streamlines annual filing precisely because it offers previous years’ returns as a template for the current season. While helpful in some regards, this also presents a trap. People forget to indicate major life changes that alter how returns should get handled moving forward.

For example, getting married, having a child, sending a kid to college, retiring, becoming self-employed, receiving an inheritance, or buying/selling property all impact tax scenarios. Failing to update software with these adjustments leads to incorrect final returns. Before starting this year’s taxes, reflect on any different life circumstances since last year's taxes that could factor into calculations.

Inaccurately Reporting Investment Activity

Investing introduces another layer of tax liability, especially with capital gains tax applying to investment income like stock earnings. Every brokerage transaction you made last year—no matter how minor—needs reporting on tax returns so the IRS can evaluate any owed taxes.

But compiling stacks of monthly statements and logging each trade proves complicated and tiresome. Often investors selectively include forms like 1099-Bs without full supplemental details assuming smaller activity gets overlooked. In reality, even minor discrepancies send up IRS red flags leading to demands for corrected returns plus fines for original under-reported amounts.

Forgetting to Maximize Above-the-Line Deductions

Come tax time, filers obsess over every possible itemized deduction hoping to decrease tax liability. However maximizing above-the-line deductions offers similar financial relief without necessitating regular itemization. Reportable expenses like educator costs, health savings account contributions, moving costs, self-employment taxes, IRA deposits, alimony payments, and student loan interest all directly reduce your gross adjusted income level.

Every dollar’s worth of above-the-line deductions decreases total taxation no matter if you take the standard deduction or itemize. But taxpayers routinely gloss over eligible above-the-line write-offs or incorrectly lump them into miscellaneous itemized expenses. Tax software facilitates correctly categorizing these directly deductible costs to leverage them fully.

Botching Business Deductions

For the self-employed, using tax software poses additional complication. Not only do freelancers or business owners need to report all company income on personal returns, but they also qualify for a subset of specialized business deductions. Things like office supplies, technology and equipment costs, phone bills, mileage deductions, inventory purchases, support staff payroll, marketing materials, continuing education, professional dues, legal fees, insurance premiums, and out-of-town travel expenses relate to operating a business.

Tracking all these costs throughout the year takes concerted effort, as does determining what percentage applies directly to business activity versus personal application. Overlooking or under-documenting eligible business deductions shortchanges you as a business owner. But deducting ineligible expenses also raises IRS suspicion if reported expenses seem disproportionate to company income.

Not Retaining Supporting Tax Documentation

Meticulously tallying all allowable deductions does little good without maintaining adequate backup documentation. Any extra tax savings claimed on a return needs substantiating with receipts, bank statements, contracts, or other records should the IRS request them for verification.

Yet, most filers throw out all financial detritus once returns get submitted, reasoning all pertinent data went into tax software already. Poor organizational habits inevitably lead to discarded receipts and missing records if audited down the road. Before sending returns this year, carefully archive relevant financial files that validate additional income sources or deductions claimed on taxes.

The Taxpayer Responsibility Principle

Approaching tax software with caution and diligence prevents unwanted repercussions with the IRS. No filer wants the expense and headache of amending returns, paying fines, losing refund money, or getting audited. Remember—ultimate responsibility for tax accuracy lies with the taxpayer, not tax preparer programs. Use software support judiciously, double-check your data entry, and keep meticulous financial records to uphold your tax filing obligations in full.

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