Tax mistakes to fix before you file in 2026

Published Thursday 2 July 2026

Table of contents

• Tax mistakes that trip up small businesses
• How tax mistakes cost your business
• Tips for avoiding tax mistakes
• What happens if you file your taxes wrong?
• Get your books tax-ready with Xero
• FAQs on tax mistakes

Key takeaways

• Tax mistakes can cause you to pay too much or too little, putting you at risk of audits and penalties.
• Common errors include claiming personal expenses, misclassifying workers, and depreciation mistakes.
• Filing errors like using the wrong form or entering incorrect numbers can delay processing and trigger penalties.
• A tax preparer can help you file accurately, and bookkeeping software helps track the numbers you need for your return.

Tax mistakes that trip up small businesses

A tax mistake is any error on a return that causes you to overpay, underpay, or fall out of compliance with the IRS. These mistakes range from simple data-entry errors to misclassifying workers or missing deductions entirely.

Tax mistakes can cause you to pay more than you really owe or put you at risk of audits, unexpected tax assessments, and penalties. To protect your small business, be aware of these common tax mistakes.

• Claiming personal expenses as business deductions: Writing off personal expenses on your business tax return is tax fraud.
• Missing business expenses: You'll pay more tax than necessary if you don't report all of your business expenses. Make sure you understand which expenses you can claim and track them carefully.
• Forgetting to report fixed assets: Asset depreciation has a significant effect on your tax liability, especially if you claim accelerated depreciation or a Section 179 deduction.
• Failing to strategize depreciation: The IRS requires you to depreciate some assets in a certain way (for example, straight-line depreciation on real estate), but you often have options. Talk with an accountant about optimizing depreciation. Depending on how much you owe this year and what you anticipate owing in the future, you may want to claim as much as you can this year or save as much as possible for future years.
• Making sales tax mistakes: The sales tax you collect isn't revenue, and the payments aren't business expenses. The only sales tax you should report on your annual business return is sales tax paid on business expenses, such as office supplies.
• Misclassifying workers: Incorrectly classifying an employee as a 1099 contractor (or vice versa) can trigger back taxes, penalties, and interest. The IRS looks at factors like behavioral control, financial control, and the type of relationship to determine worker classification.
• Misstating inventory: Overvaluing inventory increases your tax liability, while undervaluing it artificially decreases your tax liability. But you may not even need to report it. As of 2026, small businesses with average annual gross receipts under $31 million for the last 3 years can choose if they want to report inventory or not.
• Paying too low S-corp salaries: S-corp shareholders who work in the company must get paid a reasonable salary, or face heightened audit risk and penalties.
• Not tracking partner basis: Partnerships must report each partner's basis (the tax value of their ownership interest in the partnership).
• Not filing 1099 forms: You must file 1099s if you pay contractors or other businesses $600 or more during the year, with limited exceptions. The threshold increases to $2,000 for tax year 2026, with annual increases indexed to inflation. Filing late leads to penalties.
• Losing documents: You don't have to send receipts or most other financial documents with your tax return, but you'll need them if you get audited. Keep most tax documents at least 3 years but sometimes longer. For example, if you buy a capital asset, keep the sales records the whole time you own the asset.

Other common tax mistakes include filing late, not paying estimated taxes, or overpaying estimated taxes.

The IRS has more insights on how to avoid common tax filing mistakes.

How tax mistakes cost your business

Tax mistakes can lead to IRS penalties ranging from 0.5% to 75% of the tax due, plus interest charges, processing delays, and increased audit risk.

Tax filing mistakes can cost your business time and money. Take a look at the financial and time costs of common tax mistakes:

• Filing late: 5% of the tax due per month, up to 25%.
• Paying late: 0.5% of the tax due per month, up to 25%.
• Not paying estimated taxes: Interest applies from the due date of the quarterly estimated payment until you pay, at the federal short-term rate plus 3%.
• Overpaying estimated taxes: The IRS refunds overpayments, but that money should be working for your business, not being held by the IRS.
• Overreporting your tax liability: If you overstate your income or don't claim all of your deductions, you'll pay more tax than you really owe.
• Underreporting your tax liability: If the IRS catches the error, they'll bill you for the extra tax and add penalties. If the IRS thinks you're intentionally trying to evade taxes, they may assess civil fraud penalties of 75% of the under-reported tax or recommend a criminal investigation.

Errors on tax returns also increase your audit risk. Audits are time-consuming and stressful, and they can quickly lead to tax assessments if the auditor thinks you made mistakes on your return.

Tax filing errors can also delay the processing of your return. The IRS explains how common errors on a tax return can lead to longer processing times.

Tips for avoiding tax mistakes

To avoid tax mistakes, you need to be proactive. You have to think about the numbers all year, not just during tax season.

• Use separate business and personal accounts. A clear separation between business and personal finances helps to ensure you don't accidentally claim personal expenses or overlook business deductions.
• Commit to regular bookkeeping. The longer you wait to record financial transactions, the higher the risk of errors. Most small businesses should do bookkeeping at least once a month, but you may want to do it more often if you have a lot of transactions.
• Keep mileage logs. Reconstructing mileage at the end of the year is a sure way to miss trips or overinflate mileage. Keep a log throughout the year or use an app to track business miles, especially if you're using a vehicle for personal and business use.
• Set reminders. Make sure you know when you need to get documents to your tax preparer so they can do your returns. Also, set reminders for tax filing deadlines, including sales tax returns, payroll returns, informational returns (for example, 1099s to contractors), and annual tax returns.
• E-file your returns. Electronic filing reduces errors by catching common mistakes before submission. E-filing helps catch common errors before submission, and you'll get faster confirmation that your return was accepted.
• consult with a professional. The tax code is extremely complicated, and it changes every year. Consider talking to an experienced tax preparer. They can look over your bookkeeping records for errors and help you optimize the tax code to your advantage.

To make sure you file on time, review the IRS guide to deadlines for employment and contractor forms. Or look at Publication 509 to see a tax calendar with due dates for other business returns.

What happens if you file your taxes wrong?

Filing your taxes wrong can result in IRS penalties, interest charges, processing delays, and a higher chance of being audited.

Tax filing errors either lead to overpaying taxes or put you at risk of unexpected tax assessments and penalties. The consequences depend on the type of error.

• Filing late: The IRS assesses penalties for filing income tax, payroll, and informational returns late.
• Using the wrong tax ID number: The IRS may reject your return, or you'll face processing delays if you put in the wrong employer identification number (EIN) or other tax ID numbers.
• Entering numbers incorrectly: When it comes to numbers, small typos can lead to significant tax miscalculations.
• Sending returns to the wrong address: The IRS has dozens of addresses – if you use the wrong one, your return can get stuck in limbo, and in the meantime, you might get nonfiler notices and penalties. To protect yourself, e-file your return.
• Not including the right attachments: You may need to attach a range of schedules to your return for things like capital gains or losses, depreciation reports, real estate income, and foreign transactions. Forgetting these schedules can put you at risk of incorrect tax calculations, processing delays, or audits.

If you've already filed and discover an error, you can correct it by filing an amended return using Form 1040-X. You generally have 3 years from the original filing date to submit an amendment. E-filing an amended return through IRS-approved software is the fastest way to process the correction.

Get your books tax-ready with Xero

Properly filed tax returns start with good bookkeeping records. Most errors on tax returns are not due to completing the return incorrectly. Instead, they come from errors in your bookkeeping records.

To keep clean records, you need bookkeeping software that's easy to use – Xero's got you. Xero small business accounting software makes it simple to record income, expenses, assets, and loans. It automates bank reconciliation, syncs with payroll software, and integrates with countless apps.

Don't let messy books lead to stress and tax filing mistakes. Get one month free – and make sure you're ready for tax time.

FAQs on tax mistakes

The tax code is complicated. Mistakes are easy to make. The more you know, the better – keep learning with these FAQs.

What are common tax mistakes?

Common tax mistakes include filing late, not reporting all your business income, forgetting business expenses, or claiming personal expenses on your business return. Filing errors include using the wrong form, using an incorrect tax ID number, or entering numbers incorrectly.

What is the $600 rule in the IRS?

If your business pays $600 or more to a contractor or another business, you must issue them a 1099 form reporting the payments. In tax year 2026, the threshold increases to $2,000, and it's indexed to inflation for future years. There are a few exceptions – you don't have to provide a 1099 if you pay a corporation (other than a law firm) or if you issue the payments with a credit card or through a payment processing service.

Is it common for the IRS to make mistakes?

It is very common for the IRS to make errors, especially when dealing with budget and staff cuts. Common errors include:

• Misapplied payments: for example, payments applied to the wrong tax year or account
• Inaccurate penalty assessments: for example, miscalculating penalties or assessing penalties on a return that was postmarked on the due date
• Incorrect credit denials: taking away credits from qualifying taxpayers

How do people get large tax refunds?

Taxpayers get large refunds if they pay more in taxes throughout the year than they owe, or if they claim refundable tax credits that exceed their tax liability. Valuable credits for individuals include the Earned Income Tax Credit, education credits, and Premium Health Care Tax Credit, while business credits include research and development (R&D) credits, small business healthcare credits, employer tax credits, and industry-specific tax credits.

How do you fix a mistake on your tax return?

You can fix a mistake on a filed tax return by submitting an amended return using Form 1040-X. You typically have 3 years from the date you filed the original return to submit an amendment. For simple errors like math mistakes or missing forms, the IRS may correct them automatically during processing and notify you by mail.