Tax Myths

By: Michael White, CPA

The passage of the new tax law simplified some areas and made others more complex. But one thing is certain, tax myths continue to circulate and create misinformation.

1. Money made over the internet is tax free
It is easy to see how this myth could have been started. The income for most online businesses is not reported to the IRS, like for example a wage earner receiving a W2. However, the IRS has stepped up its scrutiny of internet transactions and income is income no matter which medium is used to generate the income as far as the IRS is concerned.

2. I don’t make enough money to be audited
While taxpayers with higher income stand a better chance of being audited, taxpayers who fall in lower income levels also are chosen. Perhaps it has more to do with the so-called randomness of audits than income levels. The best thing you can do is maintain good records for at least 3 years after you file so that you can defend the positions taken on your tax return.

3. The U.S. tax system is voluntary and therefore I have no obligation to file a tax return
The “voluntary” moniker just means that taxpayers are responsible for determining their own correct amount of tax due. You can go to prison for failure to file tax returns, but the IRS can’t put you in prison if you file and just can’t pay your taxes.

4. Electronic filing triggers an audit
More and more returns are electronically filed and for the most part it’s safer. Many states have mandatory e-filing and the IRS will probably follow, but audit risk is not increasing. Audit rate is holding steady at 2% and the many audit triggers are the same, e.g. filing late, errors, and high levels of certain types of income. The benefits of e-filing far outweigh any increase in audit risk.

5. Filing an extension increases audit risk
This has not been proven to be true for the most part. On the contrary, filing an extension gives you an extra six months to gather documents for filing an accurate return. Just remember it does not extend the time to pay.

6. All tax preparers are tax experts
Not every tax preparer has the knowledge and/or experience to handle complex tax issues. Taxpayers should investigate and ask questions to help determine if they are the right person for the job. Choosing a preparer in a firm with several other tax preparers who can be called upon to provide their “take” on your issues may be a better fit.

7. Tax loopholes only benefit the rich
To some folks, any amount of income not taxed is the benefit of a “loophole”. The 10 largest loopholes account for 2/3 of the estimated lost tax revenue annually. At least two of these have nothing to do with how “rich” you are:
• Health insurance benefits paid by an employer are non-taxable to the employee. Just be a wage earner for an employer who provides this benefit and you’re in.
• Married homeowner’s can exclude up to $500,000 of gain on the sale of their house. Contrast this with a landlord who can’t exclude any of the gain.
• Most wealthy taxpayers don’t qualify for credits such as the child tax and earned income credit.

Be aware of the myths and with the changing tax law. Our team stands ready to assist you in minimizing your tax burden to the maximum extent allowed by law.