As the recent report issued by the President’s Economic Recovery Advisory Board pointed out, “the tax code is complex.”
Because of this complexity, a number of “urban tax myths” sprung up over the years. Below are a dozen, followed by the truth.
Receiving a Form 1099 increases your audit risk. The mere receipt of a Form 1099 does not in any way affect your audit profile. However, if you don’t report the income from a Form 1099 on your 1040 you will eventually receive a bill from Uncle Sam for additional tax and accrued penalties and interest.
You only have to claim the income for which you receive a Form 1099. All income from self-employment, and most interest and dividends, is taxable — whether or not you receive a Form 1099.
Filing late means you're less likely to be audited. Just because you file late in the season near April 15, that does not mean you have decreased your audit risk. Also, filing an extension close to Oct. 15 doesn't decrease your audit risk either. You get audited based on your return, not when you filed it.
If the IRS didn't audit your returns, the deduction you’ve been taking all these years must be legal. Absolutely not. It just means you weren’t caught ... yet.
Claiming a home office deduction automatically triggers an audit. Before the rules were clarified in the '90s, the home office deduction was considered an audit “red flag.” Not anymore. In my 39 tax seasons of preparing 1040s, none of my clients have ever been questioned or audited by the IRS for claiming such a deduction.
Working taxpayers older than 65 don't have to pay Social Security tax. Salaries and wages are subject to FICA (Social Security and Medicare) Tax, whether you’re 3 or 101 years old, and regardless of whether or not you are collecting Social Security. I actually had an employee at one of my business clients tell me several years ago that since she was 70 I do not have to withhold Social Security tax from her paycheck anymore. This myth stems from the fact that at one time retirees 72 or older did not have to reduce or repay Social Security benefits due to excess earned income.
You can deduct the cost of your car and all its operating expenses, or mileage, as a business expense if you put advertising on the car. IRS Publication 463 states the facts: “Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses.”
You can claim a tax deduction for making a gift of up to $13,000 to your son or daughter. You can never deduct a gift to an individual on your income tax return. This applies only to the federal “Gift Tax” — you can make a gift of $13,000 per person per year without having to pay Gift Tax.
The Alternative Minimum Tax (AMT) is only for high-income taxpayers. The AMT was originally intended to make sure high-income individuals did not use tax shelters and loopholes to avoid paying their share of federal income tax. But that is no longer the case under current law. My millionaire clients never pay AMT — but many in the middle and upper-middle class have become victims of this alternate tax system.
"What do you mean it's wrong? I used Turbo Tax!" The Tax Court has on several occasions rejected the "Turbo Tax Defense" when a taxpayer attempted to blame tax preparation software for errors made on a tax return.
You can settle your outstanding IRS tax debt for "pennies on the dollar.” Don’t believe the ads for companies that make such a claim. It sounds too good to be true, and it is! These ads are referring to an IRS program known as “Offer In Compromise,” but no matter what they say, the IRS isn’t going to let you pay $100 to settle a $50,000 tax debt. If you use one of these companies you will pay a sizable fee — after all, how do you think they afford to advertise on TV? Several of the companies promising to settle IRS debt for “pennies on the dollar” have gotten into legal trouble for taking advantage of their customers.
CPAs are 1040 tax experts. The initials “CPA” have nothing whatsoever to do with one’s knowledge of, experience with or ability to prepare 1040s. All they mean is that the person can certify financial statements. A CPA passed a very difficult test on accounting issues, perhaps dozens of years ago, with minimal, if any, questions on 1040 taxation. CPAs must maintain minimal annual continuing professional education (CPE) credits — but there is nothing that says any of their CPE must be in 1040 taxation. There are many CPAs who are also 1040 tax experts, but it has nothing to do with their “initials.” The only “initials” that have any bearing on a person’s competence and currency with federal individual income tax law is “EA” — for Enrolled Agent.
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