Swap the S for a T in isso and isto as a general rule. So isTo is thiS and isSo is thaT. These words are used where no gender is implied. When gender exists use este or esta (este homem ou esta mulher). Aquele homem (that man) and aquela mulher (that woman). Aquilo means "that" where no gender is involved. But no doubt Paulenrique will correct me.
That is the way we talk, but there is a small difference, and the creators seem to have decided that:
Este/a, Isto (aqui) -- This (one here with me/us)
Esse/a, Isso (aí) -- That (one there with you)
Aquele/Aquilo/Aquela (lá) -- That (one far from us)
So, if you follow those, you won't lose hearts. Note that in speech, Brazilians say "esse" even when they mean "este", but duolingo is following the Portuguese language and writing rules.
I had come up with an explanation for aquilo vs. aquele and isso vs. esse, but I can't remember it. I think it had to do with "esse" being a defined thing (esse chapéu), and "isso" being undefined (o que é isso? o que foi aquilo?).
O que você achou daquilo? -- What did you think about that?
O que você achou daquele? -- What did you think about that (one)? O que você achou daquele chapéu? -- What did you think about that hat?
Hope it helps! =)