Middle-Income Filers: 4 Tax Missteps That Could Trigger Penalties
Most headlines about tax penalties focus on high-profile cases involving wealthy individuals or big businesses. If you’re a middle-income filer, you might breathe a sigh of relief, assuming your mistakes are too small to trigger penalties. Unfortunately, that’s not the case. Middle-income filers are still vulnerable to common errors that can lead to fines, interest and audits.
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Understanding these mistakes is the first step to avoiding them. MoneyLion spoke with Chad Cummings, an attorney and CPA at Cummings & Cummings Law, to learn which missteps commonly lead to penalties — so you can avoid them.
Not Reporting Freelance Income From Digital Channels
Many freelancers are used to being paid via direct deposit or paper check. Modern side hustlers, however, often receive payments through apps such as Venmo and PayPal. Don’t assume that using these digital channels exempts you from taxes.
While recent law changes restored the federal Form 1099-K reporting threshold to more than $20,000 and 200 transactions in a year, all income remains taxable whether you receive a form or not. The IRS can still identify unreported income through audits, platform records and other information returns.
Cummings notes that income earned through digital platforms is frequently misunderstood, especially among filers earning between $50,000 and $100,000 who may not consider themselves “high risk.”
“A filer who sells $2,000 of furniture on Facebook Marketplace and does not report the proceeds may receive a CP2000 notice proposing tax on the $2,000 with no basis offset, plus a 20% accuracy penalty under IRC 6662,” he said.
Not Disclosing Cryptocurrency Activity
The IRS requires taxpayers to answer a digital asset question on Form 1040, indicating whether they sold, exchanged or otherwise disposed of cryptocurrency during the year. Answering “no” when the correct answer is “yes” constitutes a misstatement on your federal return.
Beginning with the 2025 tax year, many crypto transactions are also reported to the IRS on Form 1099-DA, increasing the likelihood that discrepancies will be flagged.
“The IRS has sent over 10,000 compliance letters to crypto holders since 2019, and those letters often precede enforcement action,” said Cummings. “These are expensive cases to resolve and 100% avoidable when the taxpayer works with experienced tax counsel.”
Not Reporting Freelance Income Because You Didn’t Get a Tax Form
Even if you didn’t receive a Form 1099-NEC or 1099-K from a client or platform, your freelance income is still taxable. Skipping estimated tax payments can be costly.
“A filer who earns $15,000 from freelancing and skips quarterly payments owes an underpayment penalty under IRC 6654,” Cummings said. That penalty is calculated using the federal short-term interest rate plus 3 percentage points and can exceed 7% annually, depending on the quarter.
Not Double-Checking Your Return
Your tax return is one of the most important documents you’ll file each year. Reviewing it carefully — and more than once — is crucial.
Cummings warns that a CP2000 notice for unreported income can “cascade into a correspondence audit,” potentially triggering state-level tax obligations as well.
“Filing one return with a discrepancy invites the IRS to examine returns from two or three prior years, converting a $400 penalty into a five- or six-figure problem and virtually guaranteeing future audits,” he said.
The extra time spent reviewing your return could save you thousands of dollars — and a lot of stress.
The Bottom Line
Even accidental mistakes can carry significant consequences. To stay on the right side of the IRS, report all income, answer disclosure questions honestly, make required estimated payments and carefully review your return before filing.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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