The Most Misreported Income Types on Tax Returns, According to Tax Preparers
Written by
Heather Altamirano
Edited by
Zuri Anderson
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Filing taxes is already nerve-wracking enough and an innocent error can result in a stiff penalty or an audit.
What trips people up a lot is how they report their income on their taxes.
To help avoid costly mistakes, here are the most commonly misreported income types to watch for on tax returns, according to experts.
Gig Economy Income: What Rideshare and Freelance Workers Often Miss
Gig workers — from rideshare drivers to freelance consultants — may be underestimating one major tax risk: Cash payments.
“One common income mistake is overlooking gig economy income payments via Venmo or PayPal,” said Kurt Walcutt, certified public accountant (CPA) and managing principal with Sikich. “These payments are taxable and must be reported even if you do not receive a formal 1099.”
One way to address the issue is to track all payments.
“The common mistake is that people wait for the 1099 to arrive to determine what they made for the year,” said Peter Diamond, federally licensed tax, accounting, real estate, and structure and certified bankability expert. “That is a false theory.”
Financial repercussions include additional tax owed, accrued interest and an accuracy-related penalty equal to 20% of the underpayment. If fraud is involved, civil fraud penalties can reach 75% of the unpaid tax, Diamond explained.
When Your 1099 Shows More Income Than You Actually Earned
Sometimes, 1099 forms overstate the income you actually received, which can cause issues if not sorted.
“When that happens, it is critical to notify the payer immediately and request a corrected form,” said Diamond. “If not addressed, the IRS automated underreporter system will compare what was reported to them against what appears on the tax return. If the numbers don’t match, a notice is almost guaranteed.”
Underreporting Income Can Cost You Big
The most severe issue is underreporting income — meaning reporting less than what was reported to the IRS under your Social Security number, according to Diamond.
“That will typically trigger an automated IRS notice proposing additional tax, interest and potentially penalties,” he explained. “In more serious or repeated cases, it can lead to further examination. If the underreporting is deemed intentional, penalties increase substantially.”
How To Avoid Tax Return Mistakes with Proper Record-Keeping
Dealing with tax headaches can put a dent in your wallet. But according to Diamond, there’s a simple way to sidestep them: Keep accurate, categorized records of all income by source throughout the year.
“Reconcile deposits regularly and cross-reference your totals before filing,” he advised. “If you cannot maintain that level of organization yourself, hire a qualified professional to handle it properly.”
Holding onto receipts and invoices for everything is also key.
“An expense without the proper substantiation is not an expense and can be disallowed,” Diamond said.
Maintaining clear records, carefully tracking all income — including cash payments — and professional guidance from a trusted tax preparer can help make tax season go more smoothly and reduce blunders.
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